Our first CIP...step-by-step....

[Bird Dog]

Thought I would contribute back and share our journey toward our very first CIP..
Whilst I cannot share too much at this stage as the ink is still drying on the contract I will try and keep you updated over the coming weeks of our Journey in securing our first Comm Property.

DING DING.... Round # 1
Here what I can tell you about the property.
It's a factory / warehouse (with an office component) located less than 5 Klm's from Melb's CBD.
It's over 1,000sqm in size and in moderate to good condition for it's age.
It's over the 39 year cut-off for depreciation so we will request that any chattels are listed on the contract to allow for some deprecation.
Property was previously owned by a facilities management company who have kept up the maintenance of the property and we're hoping we'll need to do nothing to get a tenant...
Because the property is vacant, finance will (as always) be the number one area we'll need to work hardest at.
It's also in an area that doesn't have a huge amount of stock coming onto the market for comparison so the valuation could go either way. I'm hopeful given it's proximity to the CBD that it shouldn't be too hard to find a tenant.

Given where we are at, can I ask for your suggestions on all the things (great and small) that you believe I should be considering?
Whilst I've got a general idea, this is our first CPI and hence the learning curve will be steep so any advice will be most appreciated.

Questions I have:
1: I understand you can only depreciate a building up to 39 years old (so there is no depreciation left) however it's had an office fit-out that was completed recently. Should I get this and any chattels listed on the contract of sale? Is there any tax advantage to this? And how would I determine the value?

2: Access: We wish to have access during settlement so we can looking for a tenant immediately. We've stated this on the contract and I suspect we'll need to make a contribution to the rates during this period...correct?

3: Other than hounding the broker and valuer on a daily basis, is there anything else I should be mindful off that could delay settlement? How long before I should start panicking about finance and the valuation?

4: Any other tips and tricks that you can recommend that can either save us $$$ or ensure the process runs as smoothly as possible..

That's about it for the moment. I'm sure I'll have many, many more questions over the coming weeks and as mentioned, I hope to update you all as the journey progresses.

cheers

B.D.

PS: In boxing terms, I guess you could class us as pinweight for the moment....

 

[Wunderbar]

1. Get those chattels included if possible for depreciation and so you can offer it to a prospective tenant too, increasing your rental appeal

2. Yes you will need to make some contribution but this should be negotiable.

3. I don't think anything else could delay settlement except valuation. Maybe prepare/drawdown on some other funds you may have in other bank accounts in preparation that valuation isn't as good as you hope? That way you're not stuck waiting 3 days for funds to come in from other places

4. See 3. Why are you purchasing a vacant commercial property though? I guess with 1000sqm you could always try and ask for a residential re-zoning to make some real $$$

 

[Bird Dog]

1. Get those chattels included if possible for depreciation and so you can offer it to a prospective tenant too, increasing your rental appeal

2. Yes you will need to make some contribution but this should be negotiable.

3. I don't think anything else could delay settlement except valuation. Maybe prepare/drawdown on some other funds you may have in other bank accounts in preparation that valuation isn't as good as you hope? That way you're not stuck waiting 3 days for funds to come in from other places

4. See 3. Why are you purchasing a vacant commercial property though? I guess with 1000sqm you could always try and ask for a residential re-zoning to make some real $$$

Cheers Wunderbar. All good advice...
Re chattels, will most definitely get this listed. Any idea on how we arrive at a reasonable figure?

Re delays in settlement, we should be covered even if the valuation comes in a little short and I have also left the door open if it's is significantly different and we need to renegotiate.

As for purchasing vacant, I would have loved to purchase with a tenant already installed however we've chosen this property for several reasons.
1: It's p'sqm is quite reasonable based both on the sale of recent neighboring properties and it's rental potential (it's in a tightly held are and it shouldn't be too hard to find the right tenant).
2: Getting anything that already has a tenant and is reasonably priced at the moment in this areas is near on impossible. Seems most landlords tend to hang on to the good ones. The last time this property changed hands was over 25 years ago...
3: Redevelopment potential is an option but being the pragmatist I have several different options depending on what the market does. The area is already going through re-gentrification however we don't plan on doing anything for 5-10 years. Essentially sit on it with a reasonable tenant and wait and see what the market does.

Please keep the comments coming and as soon as ink has dried, I will post up the property to give some further perspective to the thread?

 

[Compropmanager]

Well good work on taking the drive into commercial property Birddog hope it all goes well with the bank and thanks for the info.

Also management wise, will you get an agent or self manage and I would be interested in the thought process that you go through in selecting an agent if thats where you are heading.

 

[alexlee]

Great thread, Bird Dog.

I have a question. How do you determine whether something is easy to rent out? Are there characteristics like doors wider than x, ceilings higher than y, close to major roads, etc?

 

[Wunderbar]

Commercial property is such a strange beast. In the good times you make way more than residential ever because of the compression in cap rates and an exponential increase in rents!

But given that it is a warehouse - you will probably take a bit longer to find a tenant because a warehouse is a very specific type of commercial building. Granted, it's basically a big empty shell but warehouses generally are in areas with not much foot traffic, although they are close to main roads.

Consider dividing the warehouse into 5-7 shops, each divided by a brick wall. That way you will be able to attract more people (offices, small retail) as opposed to just one large tenant (like an Officeworks). Just my 2 cents

 

[Bird Dog]

Given this is my first CIP, I will preface my comments with the disclaimer that I'm still learning and my assumptions are based on a combination of studying and spread-sheeting results for the area (for the last 9 months), assistance and confidence from my two partners who already own CIP's and a small dose of good old fashioned "nipples to the wind"...

Also management wise, will you get an agent or self manage and I would be interested in the thought process that you go through in selecting an agent if thats where you are heading.

Compromanager, at first I was considering self management however I'm leaning to-wards paying for a manager (at least the first few years anyway) but remaining hands on if you know what I mean. I will state to the tenant and manager that all correspondences is to flow through me so I can learn more about the industry.
This is not so much about saving money down the track with self management but more so I can understand my market's needs and use this when purchasing down the track. Knowing your audience so to speak.
As for how I will decide on who searches for the tenant, it may be simplistic but I have one agent in mind simply given he has a large number of listing in the area which I believe "should" give me access to the widest audience possible. Other areas I will consider will be to speak with two of his clients and to also have a look at the type of his rent role.

I'm open to any other suggestions yourself or others may have also..

Great thread, Bird Dog.

I have a question. How do you determine whether something is easy to rent out? Are there characteristics like doors wider than x, ceilings higher than y, close to major roads, etc?

Gidday Alex,
There is certainly an "black art" element to this and you can never be certain of anything.
So I won't know the real answer to this question until we locate a tenant and in the meantime, to help me sleep at night, I have allowed enough in cash reserves to have it vacant for over a year but let me answers your question on what I have learnt.
Roof Structure can play a significant part in your potential audience. The preference is typically high "Clear Span" which allows for little or no support pillars than can interrupt the flow of the space. This allows for more racking options for storage / distribution and for vehicles to pass about freely should you need them to.
Most modern warehouses have this (typically newer than 30 years) and whilst our does have pillars, there are only three clustered together. Also because of it's smaller size it's probably too small for this type of activity so we're probably not loosing out here anyway.
The other reason for high roofs is for manufacturing which can sometimes require cranes or gantries to move things about the space. Again, ours is zoned Business 3 so this isn't our target audience.
Door width and height plays a part and most modern factories are now built with container height doors which allow enough room for a prime mover carrying a shipping contain to enter and exit with ease.
Close to major arterials is also important as ease of access has a direct consequence on transport and logistic's cost's.
There is a major transport overhaul proposed in and around this area and whilst is already represents great proximity to the CBD (less than 5 klm's away) I see these things only improving it's appeal.
I have assessed it rent-ability on the following.
1: Very low vacancy rate in the area?
2: I spoke with 5 other local agents who all confirmed they could have it tenanted in under 3 months.
3: The space would be prefect for a company that needs to store / house equipment that is used across Melb.
4: It also has a number of offices attached which will suite a more sophisticated tenant with office/admin staff. Adequate staff parking coupled with the availability for more public parking out back also adds to it's appeal.
5: It was previously owned by a facilities management co that has kept the factory in good condition. It's clean and tidy inside (previous contract was for a place of worship) and could also be used for food processing etc?

At the end of the day, we won't know how good it is until we start looking for a tenant so fingers crossed.

Consider dividing the warehouse into 5-7 shops, each divided by a brick wall. That way you will be able to attract more people (offices, small retail) as opposed to just one large tenant (like an Officeworks). Just my 2 cents

I would suggest that it may not be overly suitable for retail type activities just yet Wunderbar but that may change in a few years.

 

[Highlygeared]

Hi Bird dog

may I ask approximately how much the property costs (range is fine) and how difficult it was to get finance and what the LVR was?

Thnaks

 

[Bird Dog]

Hi Bird dog

may I ask approximately how much the property costs (range is fine) and how difficult it was to get finance and what the LVR was?

Thnaks

Howdy..
We've only begun the finance process HighlyGeared so these points will be determined in the coming weeks.
I can tell you the following as one of my associates has just had a meeting with his bank manager.

Figures are
Purchase price: I'll say inder a $1mil (may elaborate a little later) as this seems to be a bit of milestone around rates. Once you get over the magic $1Mil, you can negotiate better rates.
LVR we've been informed will be 70% (but I'll believe that when it's on a contract in front of me) 65% is still perfectly serviceable.
Rate: around 8.7%
"Interest only" locked in for first 5 years..

cheers

B.D

 

[Highlygeared]

thanks BD, appreciate those details. So I guess to ensure that this is at least cF neutral for you, you're looking at a net yield of 9%...grossed up probably 10+. Great if that can be achieved by a sub million property. Usuaaly the higher yields are obtainable on larger deals.

Still, I recall one of Dazz' deals under a million that ended up with a massive yield. Got to admire the ingenuity.

The only issue I have with CIP is the LVR - pound for pound at 90%, I might be able to pick up 3 props LMI capitalised for the one CIP. Lower return given leakages which tenants dont pick up tab for but you have to say, lower risk of finding tenants too.

 

[Bird Dog]

thanks BD, appreciate those details. So I guess to ensure that this is at least cF neutral for you, you're looking at a net yield of 9%...grossed up probably 10+. Great if that can be achieved by a sub million property. Usuaaly the higher yields are obtainable on larger deals.

Still, I recall one of Dazz' deals under a million that ended up with a massive yield. Got to admire the ingenuity.

The only issue I have with CIP is the LVR - pound for pound at 90%, I might be able to pick up 3 props LMI capitalised for the one CIP. Lower return given leakages which tenants dont pick up tab for but you have to say, lower risk of finding tenants too.

I can't comment authoritatively until the deal is done and we've then found a worthwhile tenant.
At the end of the day, I can give all the details in the world but ultimately it will be determined by the first lease so I'll be sure to post my final result when it eventually comes through.

cheers
B.D

 

[evan1875]

well done BD

i will be reading your thread with great interest in the coming weeks

looking forward to the numbers

 

[Compropmanager]

ok bd a little secret between you and I

most commercial leases provide for the tenant to pay for the outgoings. This includes the "management fee" so do yourself (and partners a favour) and have someone manage it for you with you being "hands on" as you put it.

A word of warning though. once you start dealing with national, statewide or public companies as tenants the game seems to change with them requiring semi gross rent type leases (see below) for this they "normally" pay a premium in rent. however as one of my landlords found out recently they were only prepared to pay market value.

there are 3 main types of leases.

1. Gross rent - this one is easy the tenant pays the rent and and not much else similar to residential.
2. Semi gross rent - tenant pays a selection of outgoings and the landlord pays the remaining outgoings
3. Net rent - in my opinion this is the best form of lease to offer a tenant as it makes them liable for all outgoings that you can lawfully charge.

most people like to be a bit hands on especially those that prefer direct property as their chosen investment.

 

[Bird Dog]

ok bd a little secret between you and I

most commercial leases provide for the tenant to pay for the outgoings. This includes the "management fee" so do yourself (and partners a favour) and have someone manage it for you with you being "hands on" as you put it.

A word of warning though. once you start dealing with national, statewide or public companies as tenants the game seems to change with them requiring semi gross rent type leases (see below) for this they "normally" pay a premium in rent. however as one of my landlords found out recently they were only prepared to pay market value.

there are 3 main types of leases.

1. Gross rent - this one is easy the tenant pays the rent and and not much else similar to residential.
2. Semi gross rent - tenant pays a selection of outgoings and the landlord pays the remaining outgoings
3. Net rent - in my opinion this is the best form of lease to offer a tenant as it makes them liable for all outgoings that you can lawfully charge.

most people like to be a bit hands on especially those that prefer direct property as their chosen investment.

Thanks for the clarification CPM..
99% sure we'll be going through a prop manager but with me learning in the background.

I'm assuming by your title and reference that you manage properties yeah?
Can I ask a few questions then..?
I have two agents in mind to list the property and although the one I choose will ultimately be determined by a 1:1. What I currently know about each is as follows.

1: One agent has their office in the area I am viewing (but they cover all over Melb). They have about 149 properties around my area for lease.
Their website however it very amateurish and not very enticing and only talks about sales and leasing.
Agent # 1:http://www.oxfordproperty.com.au/site/index.asp

2:This agent has their premises in the CBD. They have about 130 properties available and also cover all of Melb. It has quite a slick website that is very informative and list many other services in R/E such as Asset management, development etc.
Agent # 2: http://www.cva.net.au/site/about.asp

Both have similarly large numbers of available properties and I feel this is important as I wish to have access to the widest possible audience.
I feel that to attract a national tenant however, they would be more inclined to approach Agent #2 first. Is my thinking flawed?
What else should I be considering when choosing who I should get to list the property?

Also, what is the going rate for an agent to install a new tenant?
I heard it was approx 1 months rent per year of the lease so if it's a 5 year lease, then you're up for the equivilent of 5 months in $$$. Is this about right?

 

[Compropmanager]

1: One agent has their office in the area I am viewing (but they cover all over Melb). They have about 149 properties around my area for lease.
Their website however it very amateurish and not very enticing and only talks about sales and leasing.
Agent # 1:http://www.oxfordproperty.com.au/site/index.asp

Agreed

2:This agent has their premises in the CBD. They have about 130 properties available and also cover all of Melb. It has quite a slick website that is very informative and list many other services in R/E such as Asset management, development etc.
Agent # 2: http://www.cva.net.au/site/about.asp

Both have similarly large numbers of available properties and I feel this is important as I wish to have access to the widest possible audience.
I feel that to attract a national tenant however, they would be more inclined to approach Agent #2 first. Is my thinking flawed?

In this game contacts or rather "who you know" seems to be more important most tenants that I get for our bigger properties come to us because they have dealt with us prior however never rule out the the person looking on the web

What else should I be considering when choosing who I should get to list the property?

If it was my property I would want to know about their knowledge of things like the retail leases act and other laws like zoning etc, to test this I would ask questions like what outgoings can I recover from the tenants, who is responsible for maintenance and repairs, what type of lease do they expect i.e. semi gross, net etc. whilst I am quite sure that both companies are well aware of the state of play I am always surprised.

Also if they are able to provide a maintenance Schedule(maybe for a fee) then I'd be impressed

Also, what is the going rate for an agent to install a new tenant?

depends on the agent to be honest

I heard it was approx 1 months rent per year of the lease so if it's a 5 year lease, then you're up for the equivilent of 5 months in $$$. Is this about right?

If so I am getting ripped off and need to increase my fees however these guys could be on another level, if you wouldn't mind pm me the fee structure they come up with and I can have a better look.

for reference my fees (if I am managing the property) are as follows:
1 month's rent + 5.5% of the average rental for each year after 5 years (provided there's no options) or:
1 months rental + an additional month per option that the tenant has (As I hate options and they don't give the landlords enough control when they want it in 3, 5, 10 years time.)

As you may already know the lease is the most important thing to your investment. see if you can't find out what lease they prefer to use or if they prefer you to get your own or heaven forbid have the tenants draw one up.

 

[chilliblue]

My approach would be a lot different.

Why would you not create a Gmail account or two and place a few enquiries as a potential tenant and see how they approach things.

I self contract as a commercial agent and I have no website but a strong network and relationships that I use to direct target the tenancies that I want.

However, when I work with the large international agencies, we will often use Realcommercial.com.au to advertise the properties for the Lessors piece of mind.

At the end of the day, you need to know that any agent that you employ can:

1. Lease the type of property that you are buying at a price and time length that you feel is acceptable.

2. Manage the type property that you are buying and ensuring that they have experience through all facets as retail can be commercial and vice versa.

3. Have long term staff who are well experienced.

4. Not lock you in a long contract.

Really, it is no different to a residential agreement.

Finding a good agent will be worth it especially if this is your first.

With regards to leasing fees, I would normally charge 5% of gross rental plus any advertising and marketing costs.

Smaller agencies will have the set fees but again shop around and get a feel for what is offered in your area but do not let price be your sole decision maker.

 

[Bird Dog]

In this game contacts or rather "who you know" seems to be more important most tenants that I get for our bigger properties come to us because they have dealt with us prior however never rule out the the person looking on the web If it was my property I would want to know about their knowledge of things like the retail leases act and other laws like zoning etc, to test this I would ask questions like what outgoings can I recover from the tenants, who is responsible for maintenance and repairs, what type of lease do they expect i.e. semi gross, net etc. whilst I am quite sure that both companies are well aware of the state of play I am always surprised.

That was my thinking also CPM... I figure their other rental list might also play a part as their tenants may approach them first when they are considering moving on..

Also if they are able to provide a maintenance Schedule(maybe for a fee) then I'd be impressed
Pardon my ignorance but what is a maintenance schedule?

depends on the agent to be honest If so I am getting ripped off and need to increase my fees however these guys could be on another level, if you wouldn't mind pm me the fee structure they come up with and I can have a better look.
With a little digging I've found most charge 1 months rent + whatever past 5 years as you've stated.

for reference my fees (if I am managing the property) are as follows:
1 month's rent + 5.5% of the average rental for each year after 5 years (provided there's no options) or:
1 months rental + an additional month per option that the tenant has (As I hate options and they don't give the landlords enough control when they want it in 3, 5, 10 years time.)

With a little digging I've found most charge 1 months rent + whatever % past 5 years as you've stated.


As you may already know the lease is the most important thing to your investment. see if you can't find out what lease they prefer to use or if they prefer you to get your own or heaven forbid have the tenants draw one up.

Not letting the tenants near the lease CPM. That will come from me or the agent. I can just imagine what the tenant would want to include...

When I have more info I'll shoot you a PM CPM as it would be good to get a second opinion.

 

[Bird Dog]

My approach would be a lot different.

Why would you not create a Gmail account or two and place a few enquiries as a potential tenant and see how they approach things.

Ah, like a mystery shopper Chilli....

I self contract as a commercial agent and I have no website but a strong network and relationships that I use to direct target the tenancies that I want.

However, when I work with the large international agencies, we will often use Realcommercial.com.au to advertise the properties for the Lessors piece of mind.

At the end of the day, you need to know that any agent that you employ can:

1. Lease the type of property that you are buying at a price and time length that you feel is acceptable.

2. Manage the type property that you are buying and ensuring that they have experience through all facets as retail can be commercial and vice versa.

3. Have long term staff who are well experienced.

4. Not lock you in a long contract.
Do you mean exclusivity to advertise or something else?

Really, it is no different to a residential agreement.

Finding a good agent will be worth it especially if this is your first.
Totally agree Chilli. Happy to take our time so we can get a nice long tenant that we won't have to worry about for a while

With regards to leasing fees, I would normally charge 5% of gross rental plus any advertising and marketing costs.

Smaller agencies will have the set fees but again shop around and get a feel for what is offered in your area but do not let price be your sole decision maker.

I figure a good agent will pay for themselves many times over with a great tenant so price will be low on the list of selection criteria me thinks.

cheers B.D

 

[Bird Dog]

Well the lesson for today was...
Even when you look great on paper...
Even when one member could purchase the property with cash many times over..
and even when the hot-shot business banker gives you the the "I'm so good, I've never lost a loan in 4 years" speech.... never count your chickens.

I'm a Little cynical when it comes to banks and it was great to see that they haven't lapsed on their consistency of poor service...

So we've been told we have to shuffle things a little more and juggle the numbers...

Which to me means, rather than the a simple waltz... it looks like this one will be a tango so bring it on...

We're a little under 1/3 of our way though the DD before things go unconditional and it seems the game has changed but luckily there's still a few steps we recognise so we'll keep dancing and see what happens...

Also spoke to a potential agent yesterday (one of those previously mentioned) to lease and manage the place. He seemed conservative in his estimates which was refreshing. Nice to see he wasn't overestimating to win the business..
I mentioned about the tenant paying the management fee's and he said that was very rare.. anyone else wish to comment..?

 

[Compropmanager]

As I felt in the higher bracket of the game it is not all that common but that will all change as agents get out of the dark age and start doing things properly.

I for one am spending more time on the business side things i.e. getting a better return for my landlords and keeping tenants happy at the same time and have quite a good idea as to how to go about it.

The main flaw I find in agents is that they sometimes take the path of least resistance to get it over the line. It’s not hard to negotiate the tenants not paying the management fees and other outgoings if you never point it out to the landlord or state to the landlord that it is not common place so as to not have to bring it up.

Just the other day a solicitor rang me to tell me that they have advised the client not to proceed with legal action and to just surrender the lease for the tenant. THE GUY HADN'T EVEN SEEN THE LEASE. So I explained to him that the tenant signed in a company name and we also got him to sign a personal guarantee. After I let slip that another solicitor mentioned that we had a very strong case thanks to the guarantee, gee did he do a back flip.

Sorry for the rant but just wanted to get the message across