Commerical RE

[mesquite77]

Tried the search function to see if there were previous threads discussing this, but couldn't get it to work.

Anyway, I remember Miller the Large looking and buying a NNN property, but does anyone else have experience with commercial RE? We're up to 14 residential units, but this would be our first venture into the commerical side.

I haven't seen the proposal yet, we'd be a non-recourse minority partner in a small deal with an experienced majority partner (acquaintance of 5-6 yrs of my RE partner) - 1-2 yr old buliding with a long term national tenant in a nice part of large city. I'm the numbers guy in our residential partnership, but that generally equates into measuring risk, too.

What unique red flags should I be looking for in a commercial RE property purchase? Sneaky items in the NNN lease?

[Deleted]

Define "commercial". I have some experience with retail, industrial and small office.

[mesquite77]

Details are rough right now - so far I've had a 5-10 min pc with my partner.

Retail - island in front of strip mall on the frontage road of an interstate.

[Deleted]

OK

So presumably you already understand the first problems with Commercial Real Estate which are 1) financing and 2) finding suitable credit tenants.

After securing reasonable financing terms it's really not about the lease as it is about the viabilty of your future tenants. DH and I inherited a half interest in an accessory retail "shopping center" (LOL). There were many problems but the first was getting a reasonable interest rate (i.e. refinancing the seller carry back) in the end we couldn't but that had more to do with our "partner" than anything else. Since you state you are a "non-recourse partner" I assume that you are junior to a lender and haven't signed onto the loan. So you are an "equity" or mezzanine debt partner, correct? It's important to understand your role and position in the deal. Are you always obligated to subordinate your interest to refinancing? Think about that long and hard!

Next is finding credit tenants. Out of the chute you have to think about the numbers. I've never researched it so I don't know but how many people try to set up a business? 1 in 20? 1 in 50 outside the home? I have no idea but you should. Most of them result in failure within 2 years. Do you want to deal with that side of the business?

[mesquite77]

Non-recourse - meaning we wouldn't personally guarantee the debt. Our equity could be wiped out, but the bank couldn't come to us personally for an additional amount. But we would literally own a 5-25% piece of the LLC that owns the RE.

It is just an island in front with one tenant. So if we think Walgreens is a viable tenant... that is why I'm concerned about the lease. Say Walgreens doesn't like that location (in my mind this is more probable than Walgreens completely going away, not that it isn't a possibility!), I'd like to have a lease that is strong enough to keep them paying while we find a new tenant (not as easy as repainting and replacing the carpet in a residential rental).

[Deleted]

Typically with a national credit tenant there will be an initial long term lease (say 20 years to amortize their initial investment) with a series of 5 year options to renew at FMV. You'll have to familiarize yourself with your state's commercial law but if the tenant wants to leave at year 18 typically they are going to have to keep paying on that lease until they find a substitute tenant or the lease terms out. If they stop paying you can take them to court for breach of contract which isn't cheap for either party. Just make sure you stay on top of maintenance and whatever capital improvements you as the LL promised so they can't claim that YOU didn't fulfill your obligations.

A fairly common scenario nowadays is a situation whereby your tenant is bought by another company and a few years later that company files BK due to over expansion. Leases are typically considered an asset of the bankrupt estate and one of the first actions is the bankrupt party must assume or reject its leases within 60 days of filing BK and must stay current with the rent if they assume a lease. The good part is that as a LL you aren't being held hostage for months with no revenue. The bad part is that your back rent is probably not going to get paid or will be paid at something like $.10 on the dollar like all the rest of the unsecured creditors.

At this point in time I would be super picky about investing in a fabulous long term location. Otherwise there is a glut of retail space in most locations.

[Wisconsin Beth]

Around here, Walgreen's has been getting out of retail malls and into single lot buildings. I think they own a bunch of them too. So you may want to try to figure out what the op is for the national chain.

ETA one of my siblings is a manager for Walgreen's.