I closed another great commercial investment deal for a client last week. Here’s the case study:
1. THE CLIENT
The client was a Mexican National that is now living in The Woodlands. A successful executive with commercial investments in Mexico but that wanted to find a good investment here in the US.
2. THE REQUIREMENT
The purchase price requirement was:
– anywhere from $700k to $1.5M USD.
– a cap rate of at least 10%
– willing to purchase locally or out-of-state for the right deal
– preferred single-tenant NNN deals but was willing to look at other options
3. THE HUNT
We analyzed numerous single-tenant NNN deals (many out-of-state) but each was disqualified for various reasons:
– town population too small
– population growth rate flat or negative!
– traffic count low
– crime rate high
Eventually we started looking at multi-tenant deals. Their leases are not quite as long as a single-tenant NNN deal but they provide other benefits i.e. it’s extremely unlikely that all tenants will vacate the property at the same time. If we had selected an out-of-state deal, we would both have flown to the property to complete our due diligence.
4. THE PROPERTY
Eventually we found a deal that looked promising. The asking price was just over $1.5M USD. The cap rate was 9.75%. It was a strip center with six tenants.
Upon further analysis I found:
– the town population was reasonable & expected to grow 7.5% in the next 5 years
– median age was 36, good sign, young people coming in.
– The average rent for the center was in line with the market & not way over market – a risky situation
– The leases were NNN which meant tenants paid for tax, insurance & maintenance
– The building was built in 2009 so it was still in very good condition
– The traffic count was very good
– The property was within a few 100 yards of a Walmart & right next to a CVS
– The crime rate was low, schools were good & locals confirmed
– The property was just over 2 hours drive away from The Woodlands
4. THE DEAL
We negotiated a purchase price that gave my client an 11% cap rate. This is an extremely good result as cap rates have been falling due to heavy demand from investors. An 11% cap rate basically means that that is the return an investment will generate if you paid cash for it. However, due to the fact that in this deal the investor was using some cheap financing (around 4.2% – I can show your investors how he managed to get this sort of rate) his “cash-on-cash” return was even higher.
We worked with a well-known local Law Firm to review the title commitments & the purchase contract. Our phase 1 inspection came back clean, our building inspection had no big red flags, just some minor maintenance items.
However, the seller had not completed concrete pathways at the rear of the building for 3 tenants so we negotiated an additional credit from the seller to allow us to complete that post-closing.
The day after the closing the new owner left for Mexico for a two-week vacation and I’m helping the new owner:
– transfer all utilities to the new holding entity
– transfer all service contracts to the new holding entity
– arranging for some immediate concrete repairs & some painting & possibly some striping of the parking lot
4. IN SUMMARY
The complete process from first meeting the client to closing the deal has taken about four months. But, the end result is that when the new owner returns from Mexico in a few weeks he will have a nice investment, completely stabilized, 100% leased out in a location where no red flags popped up during the due diligence process.
Contact: Lance Langenhoven
Commercial Real Estate Investment Specialist
Cell: 832-483 8655