Looking for people's thoughts on the following 2 properties...

I'm new to the Commercial Property game - reading much and learning fast...

I would appreciate the thoughts of learned ladies and gentlemen on the following 2 properties. Specifically:
- Possible pitfalls / risks to be aware of
- Possible upsides / points of appeal
- Followup questions I should be seeking to ask (and answer) before making any decisions

110 Railway Parade, Seaford, Vic 3198 - Retail for Sale #502142718 - realcommercial.com.au

Frankston Business Centre, Suite 1 & 4, 108-120 Young Street, Frankston, Vic 3199 - Offices for Sale #502179170 - realcommercial.com.au

Many thanks for your feedback,

Dave

 

The Seaford property is interesting with three income streams, makes it more appealing (reduces chances of all tenants being out at the same time)
Questions are, length of current leases, parking in the area, who pays the outgoings?
Frankston, return isn't as good, if its vacant your have zero income, so look at vacancies in the building and surrounds, check just how much strata fees are, and who pays the outgoings ......

(Not all commercial/retail leases have the tenant paying the outgoings)

 

Not learned, but interesting to see a DVD shop/hire (?) didn't think they existed any more. Not sure if I'd be seeing a long term tenant there.

Wonder who lives upstairs? The owner? Not sure there'd be great demand for an apartment on top of shops which probably have extended trading hours. Check out the neighbouring stores.

Would be checking the lease length/conditions on the telecom tower. And those mentioned above.

Anyway, some random thoughts from someone with no experience in commercial...

Cheers

 

The video shop has been there since we moved into the area ( close to 10 years now) but I didn't even think of the apartment lease and video shop being combined. More questions to add to the list

 

I'd be wary of the video shop - its a business model that is basically out - So you will need to start to think about how hard it will be to rent out.

I would look at the turnover of other shops in that street and the desirability for new tenants to move in.

Also confirm that there is no link to the video shop and the rental above - If they are linked you could lose both, if there are not linked, then that could be a good little earner for you and you would do the same DD on that as you would any other resi deal.

The phone tower is unique, I have no idea how they work, but would look at the current lease terms (length, increases in rent etc)

The second option perhaps looks a better deal, but I would want to speak to 'My Life' and see what their intentions are of hanging around.

The impression that I get of commercial is that you are in the unenviable position of having a keen interest, in someone else's business, that you have absolutely no control over.

 

-Frankston? B to C-grade office space in an outer ring suburb is at a high risk of vacancy. The yields reflect this. But to me, 7% would still not be enough.
-As above, questionable business model in a largely dead industry. Apartment is nice I guess. I would be ultra careful about the income from the telephone tower. That is just really weird to me. What are the full conditions etc? How the heck did that even happen?
-A lot of these commercial properties that offer seemingly high yields are actually very at risk of losing most of the % yield: you can realize this once you dig deep enough into the story behind each tenant and the property itself.

 

One of the things I'm struggling with..... how do you actually dig deep into the story behind each tenant/business? They're under no obligation to share the pitfalls themselves. How do we find out the facts?

 

I've sat in tenant's restaurants and counted their customers before. Many landlords do this.

 

Generally, you can't. If it's a restaurant as @Omnidragon said, order a meal, you'll soon know if it is good or bad.

You can only ask for the lease details and applications made by the tenants

 

Without revealing who you are, have a chat to the tenant when having a meal there, how is business going, are they doing well and opening other restaurants, when are their busiest times (come back and see how busy they are then), count customers etc.

If tenant is part of a a chain, get the financial statements of the chain if possible and read these, are they expanding, closing branches, in financial difficulty. Is the lease with the head office or the franchisee?

If there is a managing agent, as part of due diligence get the rent payment history of the tenant (owner's ledger).

As a fallback, should the tenant walk at the end of their lease, go bankrupt etc, you need to be confident that you can re-let the property to minimize vacancies (as well as having the financial resources to fund a lengthy vacancy).

 

Just looking at the Seaford property, I would look into the following;

• This MovieHQ store seems to have been rebranded from Civic Video. Civic is the parent company of Movie HQ. Civic seems to be hanging on but as previously said you would think that this is a declining industry with the online movie business etc...Not sure how other moviehq businesses are going but this Springwood QLD website http://moviehqspringwoodnsw.weebly.com is terrible and the listed latest releases only going to July 2015 (has it gone out of business - why)?
• I would only buy this on a very strong net yield. The current reported yield of 8% is likely gross, especially when you consider that there is a residential component and when you remove the telco tower the yield is very low.
• Can the telco tower easily relocate to another one of the buildings. What is their lease arrangement. What cap rate (yield) would you require just for the telco tower.
• What cap rate should the commercial property be, on its own. i.e. considering the tenant profile, lease term and location etc...i.e. should this be 9%+. Also what are the comparable sales rates per sqm for buildings like this and also land value.
• What rates should be the residential component be - i.e. 4.5%+. Can you sell the residential component separately.

So dissect the three components, the tower, commercial and residential and value each separately according to merits.

Because this property is in the mum and Dad price point and also DIY Super funds, there may be others looking at this on yield alone and without doing to much due diligence. You don't want to be competing against these buyers if they are around.

So do your homework and proceed with caution.

 

I see that the Seaford site has sold but Franga is still on the market @$430,000