Help with Commercial purchase DD

Hey guys,

Reasonably new to the commercial space and looking to purchase my 1st investment and have seen a couple of opportunities although have some questions that you guys might be able to answer to educate me a little.

A property i'm looking at is in a regional QLD town (not mining)
Its a corner site in the CBD and has two tenants, one has been there for 15yrs although they are not paying the outgoings, not sure why. They are on a month to month lease as well, is this common with long term tenants?
The other has just signed a 3x3yr lease with 3% annual increases. Yield is about 8.9%
The property is within the 100yr flood limit, has flooded twice in 20yrs. I know in residential this impacts the value significantly, how does this affect the value in commercial? I'm assuming lower lease value therefore lower property value? Is this a deal breaker?

 

Will be borrowing 65%

 

Check that you can get insurance. It may be pricey.

Tenant not paying outgoings - it may be a gross lease.

Tenants on holdover aren't unusual however there is a greater risk that they may leave once you settle or at any time thereafter.

 

If it's not Sydney or Melbourne, it's regional

 

From a finance perspective commercial is different to residential in that lenders will not work of proposed or expired leases for servicing purposes. Now your servicing may be so strong that you won't require the rental income for servicing but if you do then this may be a deal breaker.

Secondly, you need to figure out the loan term you are going to get and how this is going to impact your cashflow - lenders do anywhere from 15 years to 30 years.

Also what type of commercial property is it?

 

roughly 20,000 population @Rolf Latham

 

Thanks @Scott No Mates will check on insurance. Any recommendations who might insure against flood?

 

OK might have to ask the tenant to sign a lease I guess as my borrowing capacity is limited at the moment. The property is zoned Principal Centre and is leased as retail.

 

Any insurance broker should be able to find appropriate cover.

 

OK thats interesting. In the case that the property goes unleased for a long perios and I was unable to meet repayments i'm assuming

 

In your opinion (or anyones!) would you bother with the potential headache of a property that may be exposed to the risk of flood?
I would assume there would need to be some incentive to buy a flood risk property reflected with a higher yield? In your experience what do you think an average and alternatively an above average yield range would be for a regional property?

 

Risk is mitigated by the lease - the clauses lead to termination of the lease due to the premises being uninhabitable. There may be some rent relief whilst the property is uninhabitable

Slightly higher yield equating to the propensity for loss of rent over a 15-20 year period.

Yields in recent years have reduced in line with the reduction in interest rates, risk premiums on floodprone property is slightly higher than those bit affected by flood.

 

you could make an offer, subject to the month to month tenant entering into a new lease, say 5+5, before exchange. If it's rejected, then, at least you know the tenant is probably about to bail

 

Great suggestion, thanks!