Hey guys,

It’s Mo –

Recent Retail Deal I Did

Recently, I was a co-GP on a retail deal in PHX. It was a multi-tenant retail that was majority filled up and was a value add play. We bought it for around a 7.8% cap rate for $8.075mm. The NOI was around $655k and we think we can bump it up and stabilize a 9.5% stabilized yield or $767k NOI.

Assume a 7% cap rate and we think the stabilized value is $10.98mm or ~$11mm.

Not bad at all. I can do a case study on it when it gets stabilized 🙂 

This has me hunting for retail deals and I am going to show you my thought process. I’ve learned this from my mentor/friend Kevin.

The Example:

This deal is a 10.6k sq ft multitenant retail building in Antioch, CA. Annual rent is $72.7k, pro forma is $130k.

The building is 10960 sq ft, but 4560 (41.6% of building) SQFT is vacant, so this could present some upside if you find someone to lease it up.

Value Add Strategies:

• Lease “end cap” of 4560 sq ft to another bank

• Chop it up into 2-3 different suites between 1500-2700 sq ft.

• Bill back CAM’s to tenants & mark-to-market rents & lease end cap

Underwriting

Here is the underwriting model below (link to Google Sheets):

There’s CAM (common area maintenance).

One value add strategy is to bill it back.

Usually, upon lease renewal, you can bill it back. You HAVE to honor existing leases. So the month-to-month (MTM) tenant, you can add back CAM.

CAM is used to maintain common areas, so sweep parking lots, fix lighting, paint asphalt.

Usually, there is a reserves budget baked into the accounts with security deposits for when capital expenditures (improvements) need to happen.

Capex = restripe parking lots, add lighting. Anything to improve the value of the property.

Pricing

The price is currently unlisted. This means the value is in the eye of the beholder.

This is advertised as a value-add deal, so we’re going to take the monthly rent and subtract estimated expenses and take the “Owner Net OpEx” or owner net operating expenses.

This gives us $72.7k in gross income

Expenses are $22.55k net to owner.

NOI = $50.1k on actuals.

Values are to the left, cap rate is on the right.

Pro Forma

Pro forma is whatever the hypothetical “value add” plan is.

We’re assuming we will lease the vacant space for $1/ SQFT annually.

This adds $54.7k in GROSS income. This is the income schedule for pro forma

Values after pro forma rent

This is base case of $1 PSF in the 41% vacancy. This makes us a cool $1mm profit!

Not bad – not so fast.

For argument sake, we are assuming no leasing commissions + capex into our model. This is NOT the way we would normally do it, but simplicity sake*

Value Add Strategies

Lease “end cap” of 4560 sq ft to another bank

Leasing the end cap is a viable strategy. We would assume this is the path of least resistance and we' can do it for $1 PSF is gross rents. This seems easiest and we would have to add TIs (tenant improvements) and leasing commissions into the cost model.

Look at model above.

Chop it up into 2-3 different suites between 1500-2700 sq ft.

This would add more capex to our deal but we could possibly bring up rents to a premium.

This assumes we can bring up our pro forma NOI to $120k. We can increase the value of this from $1.7-2.0mm (depending on cap rate).

Mark-to-market rents & lease vacant

This is a simple strategy. We lease the vacant at $1 PSF and increase rents by 5%.

This would increase pro forma NOI to $106.9k and values would be ranging from $1.527-$1.78mm.

Pricing & Value Add:

We have a down payment of 30% ($215k) and our debt is $32.6k yearly, assuming 25 year amortization and 6.5% interest.

Assume we do the value add in the first 6 months (rare) and this is what our cash flow looks like.

So we are making $74k in FCF on a down payment of $215k after the value add.

Say we refi this and this is what my math is at…

This assumes the new value is $1.78mm, we are taking 70% out (new debt is $1.247mm).

Our new cash flow is $25.8k and we walk away with a check for almost $320k. This net proceed number assumes the difference after the pro forma NOI and paying back our initial down payment of $215k.

Assumptions

It’s a lot of work and heavily spreadsheet math. I have not checked our rent assumptions and using what the broker gave me.

Be sure to do your due diligence. Review ALL leases and understand what they actually mean.

We did not add any capex into this & assumed the tenants are funding their own TI’s. This may or may not happen in the real world. It’s highly dependent on your lease.

Model here and deck here.

Summary

Multitenant retail with value add components can be a great way to make some money. This deal can work, but requires a lot of leasing activity and TI’s which may lower your return.

Hope you enjoyed this and I’m actively looking for retail deals with my partner. If you’d like to invest, please email me.

Thank you,

Mo