Looking for commercial RE and saw this one, please help review!
I am newbie in this.  I just started to look into commercial RE. Most of them are having very low cap rate and costs multi-millions.  Then I saw this one, 1,295,000.  Cap rate 16%.  After I checked into it, it is leased by Jack in a box and the lease will be ending in March next year and will not be renewed. The property is by highway in a good location.  I am wondering besides location, what are the main cost/concerns for commercial property lease?  Obviously the building will be more fitting for fast food restaurants.  But the decor will be different.. Will it be hard to find another tenant? thoughts?  Thank you for your inputs!
[{"id": "eb3kmpg", "text": "Is it on a ground lease?", "replies": [{"id": "eb3lxaw", "text": "I am not sure.  Does it make a difference? Thanks!", "replies": [{"id": "eb3m9ge", "text": "Yes. If you purchase a property on a ground lease, you lose everything once that ground lease expires. The landlord who owns the land takes it all from you. So if you buy a property on a ground lease with a short life, you could lose everything. Anomalies like that can typically explain high cap rates. That, and weird tax abatements, though that likely doesn\u2019t apply for restaurants. Approach everything with substantial caution.", "replies": [{"id": "eb3pnsu", "text": "I will find out for sure.  But it does not sound like a ground lease.  Thank you for letting me know!", "replies": [{"id": "eb3q1xp", "text": "Sure. Have they provided operating financials beyond a single NOI figure?", "replies": [{"id": "eb3qcci", "text": "No. The rent is $17745 per month and it\u2019s 2,867sf.  No other info.", "replies": [{"id": "eb3qnp5", "text": "Got it I see. So you\u2019re assuming it\u2019s purely triple net with no expense leakage, hence the 16.4% cap rate. That also equates to $452 PSF. Where have comps traded?", "replies": [{"id": "eb3r4cg", "text": "Yes you are right that it is NNN lease.  What do you mean by comps?", "replies": [{"id": "eb3ry11", "text": "Comparable sales. What PSF sales prices have other restaurant properties achieved in the area over the past few years?", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "ebe3tm7", "text": "It all depends on the language in the lease. You may have a ground lease confused with a leasehold interest. Usually a ground lease means you own the dirt and are leasing that dirt to a tenant, so the tenant technically owns the building; however, when their lease is up, if they leave, they would need to actually take the building with them, which I've never seen happen. So essentially the downside to a ground lease is that you cannot depreciate the building on your taxes, but once the tenant vacates you inherit the building improvements that you likely didn't pay for. On a leasehold interest, however, you essentially only own the contractual agreements between two parties and collect the difference in income. For instance, someone owns the dirt and you lease the dirt from them for $100,000 annually, then you find a tenant willing to pay rent to occupy the dirt for $200,000 annually. Now the tenant pays you $200,000 and you pay the landlord of the dirt $100,000, and take home the additional $100,000 as your income. The risk, however, is that you really do not own anything, so if the tenant leaves, you are still obligated to pay rent to the landlord on the dirt...or if your ground lease is up, your ground rent may go up or you could get pushed out putting your income from tenant at risk. Does that makes sense?", "replies": [{"id": "ebe8n5n", "text": "I hear you \u2014 I am speaking from the tenant\u2019s perspective. The language i used was a simplification of the more complex reality you described in your comments for the purpose of clarity in my response to someone who was likely less experienced in CRE.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eb3l6ku", "text": "Net leased fast food restaurants are stable investments, however there will need to be a clear understanding of if this tenant has and more options to renew and their intent on staying at the subject property. If they are vacating in March, then having a strategy to re-let it to another restaurant user would be the priority.\n\nWe can help you review these types of deals.", "replies": [{"id": "eb3mdlz", "text": "They will not renew the lease.  You are right on spot that I would like to understand the difficulty/effort to re-let to another restaurant...Thank you!", "replies": [], "depth": 2}], "depth": 1}, {"id": "eb3lbdm", "text": "The risk with commercial is you could wait a long time to find a tenant. If it's going to be vacant then it's not a 16% cap rate.\n\nCommercial real estate is much more risky versus apartments. \n\nIf you could afford for the space to be vacant for a year or more then go for it. \n\nIt can be difficult to find a tenant and also you might need to save a bit of cash to remodel for a new tenant as well. ", "replies": [{"id": "eb3m7s5", "text": "Understand. Let\u2019s say each restaurant has its own way of decor.  Isn\u2019t the perspective tenant\u2019s responsibility to remodel the property? For instance, from jack in a box look to Taco Bell\u2019s look...\n\nThanks much!", "replies": [{"id": "eb3muyo", "text": "For the majority of the costs it is the tenant responsibility. However, in the majority of commercial leases I see there is always some form of TI's (tenant reimbursement) where a set $/sf is outlined in the lease of reimbursable costs to offset the tenants expense payed by the property owner. If you have access to the existing jack in the box lease you should be able to see what the TI's were in the first few pages, unless this was a build to suit site in which case I am not sure how TI's would be handled.", "replies": [], "depth": 3}, {"id": "eb3n0h4", "text": "It's all negotiable in the lease. It depends on the tenant and your market. \n\nIf another location nearby is willing to chip in some of the cost to remodel, and you won't on your space, they would go there potentially.\n\nAnother option is you can offer to reduce rent instead of pay remodel costs. Or offer free rental periods etc. \n\nI have seen free rental period anywhere from a couple months out to an entire year depending on what work the tenant will be doing to the building and size of tenant. \n\nQuestion is do you want to lose a solid 5+ year tenant because you dont want to spend X dollars now? That question has a different answer for every owner depending on the tenant. ", "replies": [], "depth": 3}, {"id": "eb3n24r", "text": "Usually the landlord will pay for tenant improvements up to a certain amount. It obviously varies a lot depending on type of commercial property and the tenant but we always start our analysis at one years rent and go from there for new tenants.", "replies": [{"id": "eb3wm5r", "text": "Any branded/franchise stuff is the tenant responsibility, but some improvements like a bathroom remodel can be partially covered based off of how much the cost is and improved value is. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "eb6ne41", "text": "&gt; If it's going to be vacant then it's not a 16% cap rate.\n\nYou cannot say that.  Occupancy does not affect cap rates.", "replies": [{"id": "eb6nqao", "text": "Maybe I didnt phrase it the best. You dont know for a fact you will get the same rent. \n\nYou need to look at other comps to figure out what you could get it rented for in the current market to figure out the real cap rate. \n\nSeller is basing their sale price off the current tenants rent. Odds are you will not be able to replace it at the same rent. I think the cap rate will be much lower when you actually find a tenant. \n\nThat's why its selling at such a high cap rate by the way, the tenant is leaving, so they need to make it seem very attractive and priced accordingly.\n\nI guarantee if the tenant had 10 years left on the lease it would not be listed fora 16 cap ", "replies": [{"id": "eb6q2ia", "text": "&gt; Maybe I didnt phrase it the best. You dont know for a fact you will get the same rent. \n&gt; \n&gt; You need to look at other comps to figure out what you could get it rented for in the current market to figure out the real cap rate. \n\nAn INVESTOR NEVER needs to calculate a cap rate,  That is done by third party professionals.  Same rent???  the ONLY reason to use direct capitalization is because you are trying to value NOI's that consist of below/above market rates.  You do not understand cap rates.  They are only building specific when an actual sale happens.  if the tenant has 10 days or ten years left does NOT affect the cap rate.  Please elaborate on how that would work.", "replies": [{"id": "eb6r4rk", "text": "Investors very often target cap rates and have goals of what they want to achieve. Maybe you dont work with very savvy investors, but almost everyone I work with is calculating what their cap rate will be. \n\nIt's not a 16% cap rate if they move out and you can only replace them with a tenant paying half as much. If your goal was a 16% cap rate then you just overpaid. You need to look at current comps to get an idea of how the property will perform going forward, not based on the tenant that's leaving. \n\nI think maybe you are the one that is misunderstanding cap rates? They are used in many different ways.", "replies": [{"id": "eb6sd54", "text": "&gt; Investors very often target cap rates and have goals of what they want to achieve. Maybe you dont work with very savvy investors, but almost everyone I work with is calculating what their cap rate will be. \n&gt; \n&gt; It's not a 16% cap rate if they move out and you can only replace them with a tenant paying half as much. If your goal was a 16% cap rate then you just overpaid. You need to look at current comps to get an idea of how the property will perform going forward, not based on the tenant that's leaving. \n&gt; \n&gt; I think maybe you are the one that is misunderstanding cap rates? They are used in many different ways.\n\nNope this is my area of expertise.  Investors don't buy cap rates, why would they?  You don't \"achieve\" a cap rate, it is a market metric.  If you want to buy at a 10 % cap rate you go to a 10% market or a 12%, 14% market and OVERPAY.  Geez, how does that NOT make sense to you?  The tenant leaving only means that you value at current market metrics.  Cap rates are one of those metrics.  The vacancy is ONLY reflected in the sales price not the cap rate.  ", "replies": [{"id": "eb6t6oe", "text": "Who pissed in your cornflakes this morning? \n\n\"The vacancy is only reflected in the sale price not the cap rate\" \n\nSure, except when you replace it with a tenant paying half as much, what happens to your cap rate then? \n\nMy point is it's likely only a 16% cap rate because the price is lower due to the tenant leaving. Not sure how many other ways I can put it for you. We are saying the same thing.\n\nAlso you are wrong investors look very closely at cap rates. All a cap rate is, in essence, is if you purchased a property cash what % return are you getting on your money, that's basically a cap rate. It's a good way to compare properties if you can figure out an accurate NOI \n\nAlso I see now, just looking over your past posts, you're basically a troll that rages at everyone you post to. Also very touchy and the self proclaimed king of cap rates. Have a good day, you know the basics but are off base when it comes to investors and what they look for how what a cap rate means. ", "replies": [{"id": "eb6tf4u", "text": "&gt;  All a cap rate is, in essence, is if you purchased a property cash what % return are you getting on your money, that's basically a cap rate. It's a good way to compare properties if you can figure out an accurate NOI \n\nShow me EXACTLY how this comparison process works and how a \"savvy\" investor uses it to their advantage.  And while you are at it explain how an \"investor\" doesn't get fucked buying at 10% in a 14% market.  This should be fun.", "replies": [{"id": "eb6tkhq", "text": "What are you even talking talking about I have clearly multiple times explained it to you? You're a troll all your posts are of you getting angry at everyone. I hope your life improves you sound like a piece of work. No wonder you delete so many posts you make, I can only imagine what those were. ", "replies": [{"id": "eb70pr2", "text": "I NEVER delete posts.  People that argue against me that finally realize they have no clue delete their posts.  Step up big man and make your point.  YOU will crumble.", "replies": [{"id": "eb71379", "text": "Anyone can look at your profile and see you have deleted posts, why lie about something so obvious and something that I made clear I already checked? You're clueless. ", "replies": [{"id": "eb7kzsj", "text": "NOPE!  I never delete posts.  Step up and prove your case.  FAKE NEWS!  ", "replies": [], "depth": 12}, {"id": "eb7lduc", "text": "u/baumbach19   please explain since you are already lying about my posts.  ", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "eb6tkdc", "text": "&gt; Who pissed in your cornflakes this morning? \n\nSeemingly the guy that doesn't know what PGI is.  Hey, I'm in Honolulu looking out at the Pacific Ocean drinking scotch and trying to educate the masses.  Peace!", "replies": [], "depth": 8}, {"id": "eb6to42", "text": "&gt; Sure, except when you replace it with a tenant paying half as much, what happens to your cap rate then? \n\nAbsolutely fucking nothing!  Please show me what YOU think it does to \"YOUR\" crap rate.  I like math.", "replies": [{"id": "eb6tuzz", "text": "Ok you buy this property for the advertised price, which is 16% cap based on the current tenant. Day after you close the tenant moves out ( which you knew their lease was ending).\n\nNow you can only re rent it for HALF as much what that tenant was paying. You re rent it. Now you go to sell it.\n\nWhat cap rate do you need to sell it at to get your money back? I think you can figure that out yourself. You're a self proclaimed expert, your NOI is cut in half or worse, what happens to the cap rate? ", "replies": [{"id": "eb7ksgn", "text": "Gawd you need to stop posting in the commercial real estate subreddit.  I am recognized by the state of CA as an expert witness on valuations.   What are your qualifications?  \nNOTHING happens to the cap rate.  GEEZ, do you even know what PGI is.  How do YOU value a brand new VACANT building????????????????????????????  Answer that and I will spend time EDUCATING you.", "replies": [{"id": "eb7ygo2", "text": "If you go to sell and your NOI is half of what is was what do you advertise the cap rate at? Quit avoiding the question. ", "replies": [{"id": "eb89doe", "text": "The cap rate is a market based metric.  If NOI is selling at 10% then that is what the NOI will sell for.  If a property is 50% occupied and 95% is the norm then you will buy at 10% cap rate with a below the line adjustment for the expenses and lost rent and risk to get it 45% MORE occupied.  Geez, do you think a brand new vacant building sells for a ZERO % cap rate?  Think about it , do the math and then get back to me.  Or go hang out in the at the Kat subreddit.  LOL", "replies": [{"id": "eb89lch", "text": "That's why I said you need to base your decision off market rents, not what the current tenant is paying. We are saying the same thing, you're just an pompous asshole that is terrible at conversing with people.", "replies": [{"id": "eb8cja9", "text": "We are not saying the same thing.  You are cluelessly talking ignorant about cap rates changing because of rents.  ", "replies": [], "depth": 14}], "depth": 13}], "depth": 12}, {"id": "eb8iojc", "text": "What cap rate does a vacant building have?", "replies": [{"id": "eb8urui", "text": "You look at comparable properties to figure out what market rents are. Exactly what I have said 5 times. You choose to ignore or you dont care to read probably both.", "replies": [{"id": "eb95jql", "text": "&gt; You look at comparable properties to figure out what market rents are. Exactly what I have said 5 times. You choose to ignore or you dont care to read probably both.\n\nWhat does this do for you?  ", "replies": [], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "ebb49y7", "text": "&gt;Also I see now, just looking over your past posts, you're basically a troll that rages at everyone you post to. Also very touchy and the self proclaimed king of cap rates. Have a good day, you know the basics but are off base when it comes **to investors and what they look for how what a cap rate means.**\n\nIf you've read those posts you will see that just like you no one was able to articulate exactly HOW the rates are used in their fantasy world.  \"Um, you take one number and get another number and then you ponder that number\".  See,  if what you are saying is factual then why can't you explain simply HOW you use cap rates?  You can't!  I challenge you!", "replies": [{"id": "ebb571x", "text": "If you buy a building for cash, the cap rate is your return on your investment. Its pretty basic what a cap rate shows you. Why you keep asking how someone could use cap rates is beyond me. See a property, what return can I make on the property?, figure out cap rate, done. One example of how to use it. \n\nSecond example, If I see a property selling for a 12% cap rate, but everything else in the market is selling for 10%, then perhaps it's being under rented. Or vice versa, you can get an indication if a property is over priced. \n\nThere, two examples of how to use a cap rate. \n\nLike I said you're a troll you respond to no questions, you just fling questions back acting like a child. Quit messaging me it is getting annoying. You have said nothing useful to anyone, and have nothing of value to add. ", "replies": [{"id": "ebb9fk3", "text": "&gt; If you buy a building for cash, the cap rate is your return on your investment. Its pretty basic what a cap rate shows you. Why you keep asking how someone could use cap rates is beyond me. See a property, what return can I make on the property?, figure out cap rate, done. One example of how to use it. \n\nCap rates are the same whether a property is paid in cash or has 125% financing.  You are confusing different metrics.  Example 1 FAIL.\n\n", "replies": [{"id": "ebb9k6n", "text": "I never said they were different, it's a way to compare what a property returns. Are you dense? Stop messaging me you aren't saying anything of value to anyone honestly. ", "replies": [{"id": "ebbcvc1", "text": "Cap rates don't measure returns.  Geez, a higher cap rate is the result of the market paying less for the exact potential NOI.", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "ebb9nv3", "text": "&gt; Second example, If I see a property selling for a 12% cap rate, but everything else in the market is selling for 10%, then perhaps it's being under rented. Or vice versa, you can get an indication if a property is over priced. \n\nIf the market is 10% then an asking price at 12% is meaningless.  Make your offer at 10% and move on.  UNDER RENTED!   OMG!  How does that affect a cap rate.  Example 2 FAIL", "replies": [{"id": "ebb9wgy", "text": "Why would you offer 10% if they are asking 12%?? \n\nYou like to pay over asking for property? You literally make no sense, and you dont add anything to the conversation. ", "replies": [{"id": "ebbd4tz", "text": "People don't sell NOI's at 12% in a 10% market.  Likely they are trying to start a bidding war.", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "ebb9rbd", "text": "&gt;  but everything else in the market is selling for 10%, \n\nWhere are you getting this information?  ", "replies": [], "depth": 10}, {"id": "ebb9vil", "text": "&gt;  If I see a property selling for a 12% cap rate,\n\nOnly a complete idiot would sell a NOI at 12% in a 10% market.  Is this your property?", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "ebb4rjp", "text": "&gt; It's a good way to compare properties if you can figure out an accurate NOI\n\nExactly how?", "replies": [], "depth": 8}, {"id": "ebg41ph", "text": "Don\u2019t waste your time. U/honobob is a troll. Look at his post history, absolute shit brain. He\u2019s arguing with actual participants in the industry trying to \u201ceducate\u201d us on how to evaluate real estate, myself who has financed over $2 b the past couple years of class A trophy buildings in SF for pension funds and institutional investors, and u/2b8376da68 who is an acquisitions officer for Blackrock. Unbelievably annoying. ", "replies": [{"id": "ebg5bab", "text": "Ya I realized this after some time. Just stopped replying. Nothing you say to him matters he just repeats his drivels.\n\nIm a commercial broker I focus on multifamily, It's pretty amazing how hes the only one in this industry who knows how cap rates work /s ", "replies": [{"id": "ebgcc5p", "text": "Well you gotta look up PGI, duh. ", "replies": [], "depth": 10}, {"id": "ebh5cy5", "text": "&gt;Ya I realized this after some time. Just stopped replying. Nothing you say to him matters he just repeats his drivels.\n\nBecause NONE of you can answer basic questions.  And you say you USE cap rates but you can't explain how.", "replies": [{"id": "ebnnblu", "text": "U/baumbach19 - I figured out who this loser is. Some jr appraiser at cushman who got called up from the minors when their entire leadership switched teams. Explains a lot about his post history. A nobody who doesn\u2019t understand fundamentals. Probably went to UC Fullerton. Lmao", "replies": [{"id": "eboh4jh", "text": "&gt; U/baumbach19 - I figured out who this loser is. Some jr appraiser at cushman who got called up from the minors when their entire leadership switched teams. Explains a lot about his post history. A nobody who doesn\u2019t understand fundamentals. Probably went to UC Fullerton. Lmao\n\nNope, just like your real estate figgers you are wrong again!   Can't you get anything right?  Ask around and ask WHO has valued over $40,000,000,000!  It won't be any lame poseurs that think occupancy changes cap rates.  GEEZ", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "ebwtpd3", "text": "I\u2019ve just been reading a few of these threads that this honobo douchebag has commented in. I\u2019m not sure you could be a larger cocksucker than this guy. So full of himself and gets his rocks off putting other people down. My guess is he has very few people in his life that truly like him and he makes up for his insecurities by trying to be Mr. Oracle on Reddit. Seems like if you were so smart and significant in the RE world, you wouldn\u2019t be posting shit to Reddit. And dick bag, if you see this, please try to respond, id love to see how others feel about you. ", "replies": [], "depth": 10}], "depth": 9}, {"id": "ebgkvu1", "text": "&gt;Don\u2019t waste your time. U/honobob is a troll. Look at his post history, absolute shit brain. He\u2019s arguing with actual participants in the industry trying to \u201ceducate\u201d us on how to evaluate real estate, myself who has financed over $2 b the past couple years of class A trophy buildings in SF for pension funds and institutional investors, and   \n&gt;  \n&gt;u/2b8376da68  \n&gt;  \n&gt; who is an acquisitions officer for Blackrock. Unbelievably annoying.\n\nHa, I happened to do the valuation on the 97% Blackrock occupied Foundry Square building along with the other three.  And my class A SF office experience is about $40,000,000,000.  Hell, One Market is a billion dollar property.  That would mean you were involved in 2 transactions!  Poser.", "replies": [{"id": "ebnln09", "text": "So you work in valuations for cushman Wakefield? That explains it. Place is a dumpster fire after losing everyone to Newmark. Looks like you need to go to re education camp. \n\nI\u2019m going to call Mike Davis, find out who you are and expose you, you little prick. ", "replies": [{"id": "ebnlwha", "text": "Suck my little prick.", "replies": [{"id": "ebnm3y9", "text": "That\u2019s what I thought. We stopped using you fucking morons a long time ago. Absolute shit product. This makes so much more sense now with that context. You\u2019re done bro. ", "replies": [{"id": "ebogtvq", "text": "&gt; That\u2019s what I thought. We stopped using you fucking morons a long time ago. Absolute shit product. This makes so much more sense now with that context. You\u2019re done bro.\n\nWrong guess and I am still the one that can answer questions here.  YOU have only deflected to conceal your ignorance.  Teach us your skill!\n", "replies": [], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eb3lv8q", "text": "cap rate is meaningless if they're vacating...see what it is psf and compare it to similar properties that are also vacant...in my market some former qsr's have a hard time selling...a lot just want the land, but may be a good opportunity ", "replies": [{"id": "eb3pjs2", "text": "Good point!  I have no idea how local market performs in terms of psf.  I need to find out for sure.  Thank you!", "replies": [], "depth": 2}, {"id": "eb5vw85", "text": "You would use direct capitalization (cap rates) to value the property as vacant using current market metrics.  Their NOI would be meaningless, not the current market cap rates.", "replies": [], "depth": 2}], "depth": 1}, {"id": "eb3m8ca", "text": " Odds are you won't find the tenant but will need a broker to assist (and include those fees into your projections).  It is not unusual for landlord to pay for the fit out expenses for new tenant so you should include that in your projections.", "replies": [{"id": "eb3prqd", "text": "Looks like it will be all costs after the lease end, remodel, new tenant acquisition etc...  Cash flow will be a big issue...", "replies": [], "depth": 2}], "depth": 1}, {"id": "eb3mcbl", "text": "Look for a self storage facility. Easy to run, low maintenance, and you get income from the start.", "replies": [{"id": "eb3q1tt", "text": "Everybody would love to see this kind of passive income.  Why they want to sale in the first place, lol No offense at all, just feel too good to be found..", "replies": [], "depth": 2}], "depth": 1}, {"id": "eb3qs1j", "text": "If new to commercial I\u2019d try to stick to industrial, it\u2019s affordable, very little tenant improvements as well.", "replies": [{"id": "eb3r6ub", "text": "Can you be more specific as far as what kind of industrial I should be looking at? Thanks!", "replies": [], "depth": 2}], "depth": 1}, {"id": "eb3sjfk", "text": "Oh, I don\u2019t know yet. I need to find out...", "replies": [], "depth": 1}, {"id": "eb3st9e", "text": "Ends in March? By th time you close this thing, your cap rate will be very close to 0%. It\u2019s unfinancebale so you will need to close all cash. ", "replies": [{"id": "eb3u8tk", "text": "You are right.  I end up getting nothing out of 16%.. Thank you for all the good inputs!", "replies": [{"id": "eb6pncq", "text": "&gt;You are right.  I end up getting nothing out of 16%..\n\nWhat would you think you were getting?", "replies": [], "depth": 3}], "depth": 2}, {"id": "eb5w7bl", "text": "Occupancy does not determine cap rates.", "replies": [{"id": "eb60k7n", "text": "Care to elaborate? ", "replies": [{"id": "eb6jxmn", "text": "Cap rates reflect the desirability of NOI.  If vacant you would use market cap rates to value starting with PGI.  Then you would value using market expenses, etc.   That would value the deal based on the property operating to market.  But is is not.  So you would make a below the line adjustment for the lost rent, expenses to get it leased, and risk.", "replies": [{"id": "eb6uieq", "text": "Lmao. It sounds like you googled a bunch of real estate jargon and threw up on the page. Let me break it down for you-\n\nCap rate is NOI / value (purchase price). If OP buys a 100% vacant box, which will be the case, then there is no income, in fact income will be negative after expenses. Now if you want to make an assumption about downtime until the next tenant gets in there, and project the NOI, based on market rents and expenses, you can do that, but to say cap rates do not rely on occupancy is incorrect.\n", "replies": [{"id": "eb70l1g", "text": "So a vacant building is worth $0.  Let's see the math on that/", "replies": [{"id": "eb717jt", "text": "I didn\u2019t say that. I said occupancy affects the cap rate. I financed $2.6 billion of commercial real estate over the past 4 years dude. Tell me your background. ", "replies": [{"id": "eb7l7pc", "text": "How about $40 BILLION in valuations. Now step up and show all of us how occupancy effects the cap rate.  \n\nELI5.  How does occupancy affect a cap rate u/neuropat", "replies": [{"id": "eb7w9ss", "text": "It reduces income which is a fucking input, you imbecile. ", "replies": [{"id": "eb89nvp", "text": "AGAIN, show me the math how that INPUT changes a cap rate.  P.S. look up PGI.  ", "replies": [{"id": "eb8oj7q", "text": "I\u2019ll walk you through it again, son. Cap = NOI/purchase. More occupancy = less NOI, which is a lower cap. \n\nCap rate is simply a yield calculation. If you have more occupancy, you\u2019re going to have less income and therefore a lower yield.\n\nEg - $25 net on a $415 purchase is 6%, but throw in 15% vacancy and it\u2019s a 5% cap. \n\nYour flawed approach would imply two identical buildings in the same market, but one 100% occupied and one 0% occupied would be valued the same, which is wrong.", "replies": [{"id": "eb93ax0", "text": "Nope wrong again!  Cap rates come from an income approach to value called direct capitalization.  If both buildings are comparable they would be valued using the EXACT same market cap rate.  The vacant building would then have a below the line adjustment for the lease up costs etc.  It's math.  What wild ass method would you use to value the vacant property?  I would probably get a good laugh.", "replies": [], "depth": 12}, {"id": "eb9bzrz", "text": "&gt;  More occupancy = less NOI, which is a lower cap. \n\nThree identical buildings in the same market.  Because of the timing of the leases  one buildings NOI is $100,000, the second building is $200,000 and the third is $300,000.  Recent sales have been made at 10% cap rate.  These building would all sell for the same cap rate so they would sell for $1,000,000, $2,000,000 and $3,000,000.  See the market price changes NOT the cap rate.  Anyone dealing with commercial properties should know this.", "replies": [], "depth": 12}, {"id": "eb9egxc", "text": "&gt; Eg - $25 net on a $415 purchase is 6%, but throw in 15% vacancy and it\u2019s a 5% cap. \nNOPE!  If the cap rate That NOI's are selling for is 6% then the greater vacancy would only have a below the line adjustment that would affect the sales price.  No matter what the vacancy rate is the property would still be valued at a 6% so $417,000.  Then you would subtract from that sales price the lease up costs and lost rent, etc. which may well be minimal.  Cap rates reflect the desirability of the NOI.  Your backwards process just creates a meaningless number.\nWhat you \n\n\n\n\n", "replies": [{"id": "eb9gj83", "text": "Dude you\u2019re just wrong. Stop. Typical appraiser throwing out meaningless below the line adjustments. I transact dude. I would not pay the same for a 100% vacant building that I would for a 100% occupied building. We all know at the end of the day, your useless ass is concluding your market value to whatever I buy it at, so stop playing games. ", "replies": [{"id": "eb9j8jn", "text": "&gt;Dude you\u2019re just wrong. Stop. Typical appraiser throwing out meaningless below the line adjustments. I transact dude. I would not pay the same for a 100% vacant building that I would for a 100% occupied building. We all know at the end of the day, your useless ass is concluding your market value to whatever I buy it at, so stop playing games.\n\nCluelessly transacting dude.  In your own example you state the property will sell at the exact same price even tho one has 15% more vacancy BUT in your deluded world the only thing that changes is the cap rate!!!!   I can show you how to value a property that is vacant or has higher than normal vacancy.  I'd sure like to see you try.  Step up man or change to teller instead of banker.  A banker would not be this ignorant.", "replies": [{"id": "ebbam8j", "text": "Let\u2019s do it your way. Market cap gives you market value, then deduct below the line lease up costs to get to stabilized occupancy. That reduces the purchase price. Therefore, occupancy affects market value. Either way you can\u2019t get away from it. You\u2019re just fucking wrong (and dangerously misunderstanding basic concepts). I hope for your clients sake someone is looking over your work. I wouldn\u2019t pay a dime for your shit. ", "replies": [{"id": "ebbded0", "text": "Finally!  You get it!  Cap rates are a market based metric and occupancy changes sales price NOT cap rates.  See, you learned.  ", "replies": [{"id": "ebecncz", "text": "Let\u2019s see if you can do basic math.\n\nQuestion 1- you buy a property that produces $5/sf of NOI for $100/sf. What\u2019s your going in cap rate?\n\nQuestion 2- you buy a property that produces $2.50/sf of NOI for $100/sf. What\u2019s your going in cap rate?\n\nHint- the property in question 2 has lower occupancy.", "replies": [{"id": "ebef0ak", "text": "&gt;Let\u2019s see if you can do basic math.  \n&gt;  \n&gt;Question 1- you buy a property that produces $5/sf of NOI for $100/sf. What\u2019s your going in cap rate?  \n&gt;  \n&gt;Question 2- you buy a property that produces $2.50/sf of NOI for $100/sf. What\u2019s your going in cap rate?  \n&gt;  \n&gt;Hint- the property in question 2 has lower occupancy.\n\nExactly, basic math without ANY understanding of the concept of direct capitalization.  That is where the \"cap\" part comes from.\n\nWHY, why why would any intelligent  investor be calculating a cap rate AFTER the sale or even before it?  Only a wannabe internet investor or some moron that paid $40,000 to a GURU would waste their time.\n\nSo in 1.  you got a 5% number and in 2. a 2.5% number.  You really can't call those numbers cap rates since you have no analysis.  Heck, you don't even have PGI.  Those numbers mean absolutely nothing.   Now if in 1. I looked at the market cap rates and learned they were ten and then verified that the property was operating to market and stabilized then I would use direct capitalization to accurately value the NOI.  $5 / 10% = $50!!!   See, you overpaid because of your ignorance.  Ha Ha", "replies": [{"id": "ebef69n", "text": "Yikes. Nope. Again basic yield calc. I don\u2019t even want to start taking about IRRs and equity multiple waterfalls... It\u2019ll blow your mind. Sorry man, we\u2019re done here. No more free lessons for you.", "replies": [{"id": "ebefwdn", "text": "Wondering how long it would take you to slink off when you realized your understanding of cap rates is wrong.  Geez, you think you could teach anyone when you can't show how you would value a building at 95% occupancy and also the same building if vacant.   Run away little boy.  ", "replies": [{"id": "ebeh53u", "text": "We\u2019re not discussing how to value a vacant building. We\u2019re discussing how to calculate income yield on an acquisition. You\u2019re just too stupid to understand the nuanced conversation that the grown ups are having. ", "replies": [{"id": "ebehk72", "text": "&gt; We\u2019re not discussing how to value a vacant building. We\u2019re discussing how to calculate income yield on an acquisition. You\u2019re just too stupid to understand the nuanced conversation that the grown ups are having.\n\nNo, you made the absurd comment that occupancy affects cap rates.  A vacant building would definitely have more vacancy than a 95% occupied building but you cannot support your statement by doing the actual valuation because you are a internet faker.  If you really had any basic knowledge you would be able to do this easily.  Don't ya think?  ", "replies": [], "depth": 22}], "depth": 21}], "depth": 20}], "depth": 19}], "depth": 18}], "depth": 17}], "depth": 16}, {"id": "ebbpfxt", "text": "to say cap rates do not rely on occupancy is incorrect.\n\n&amp;#x200B;\n\nYou flipped, you flopped.", "replies": [{"id": "ebecs5p", "text": "You\u2019re a dense motherfucker. You wouldn\u2019t pass a basic screening I do to hire a goddamn summer intern. Let alone work in the industry with your understanding. Please tell me what firm you work for. ", "replies": [{"id": "ebee561", "text": "Then why can't you factually and simply explain HOW I'm wrong?   Hmmmmmmmm", "replies": [], "depth": 18}], "depth": 17}], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "ebednhg", "text": "u/neuropat is right. I don\u2019t know if you\u2019re a troll or just misunderstanding basic CRE fundamentals, but cap rates are absolutely affected by occupancy. It\u2019s why gateway markets trade for tighter caps than secondary markets - higher rents and lower long term occupancy. Btw- I work acquisitions for Blackrock.\n\nOnly reason I\u2019m wasting my breath commenting here is so that others reading this understand that you\u2019re absolutely confusing principles in this comment thread. ", "replies": [{"id": "ebedxdi", "text": " Lol", "replies": [], "depth": 6}, {"id": "ebedyp3", "text": "Lol That dude is a fucking retard. Probably a junior analyst at some \u201cB\u201d advisory shop fresh out of his state school. Needs to get his money back on whatever degree he just used to con his way into the industry. ", "replies": [{"id": "ebgedl3", "text": "&gt;Lol That dude is a fucking retard. Probably a junior analyst at some \u201cB\u201d advisory shop fresh out of his state school. Needs to get his money back on whatever degree he just used to con his way into the industry.\n\nRetired multi-millionaire that so far has been the ONLY person on this thread that can actually explain the income approach to value called direct capitalization.  Neither of you can answer any of my questions or even explain how your incorrect process works.  Geez.", "replies": [{"id": "ebgeff7", "text": "Yeah sure buddy. Fuck off you shit house fly. ", "replies": [{"id": "ebgjh6s", "text": "Crybaby.  Show us your stuff instead of avoiding the discussion.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "ebedz94", "text": "&gt; but cap rates are absolutely affected by occupancy. \n\nHOW? \n Just show me the correct math.\n\n", "replies": [{"id": "ebeg49z", "text": "You are discussing how to determine market value. Project income and apply market cap. u/neuropat is talking about determining income on an acquisition - project income and divide by your purchase price. Neither of you are wrong in your theory, it\u2019s two different things - theoretical value vs actual yield on an investment. But your initial comment that occupancy doesn\u2019t affect the cap rate on an investment (after determining your purchase price) is incorrect. You\u2019ve already established what you are paying for the asset, so the only thing left is to divide the income, which will be higher or lower depending on occupancy. ", "replies": [{"id": "ebegdaa", "text": "&gt; But your initial comment that occupancy doesn\u2019t affect the cap rate on an investment \n\nShow me the math!", "replies": [], "depth": 8}, {"id": "ebegeym", "text": "&gt; u/neuropat is talking about determining income on an acquisition - project income and divide by your purchase price.\n\nThat is not how cap rates work.", "replies": [{"id": "ebeh0m3", "text": "I\u2019m an acquisitions officer for Blackrock. I can assure you we use Argus to project income and look at year one NOI vs what we are offering for the asset or portfolio, put that on a memo and say this is the going in cap. Then we look at leveraged returns and see if it meets our hurdles. We don\u2019t say, oh this property is in San Francisco, don\u2019t worry about checking the income, it\u2019s a 4% cap.\n\nYou don\u2019t know what you\u2019re talking about. ", "replies": [{"id": "ebehq47", "text": "So you would buy at a 4% cap rate in a 10% cap rate market because you are doing the calculation backwards.  How does that make sense?  What do you use your fake cap rate for?", "replies": [], "depth": 10}, {"id": "ebehqa9", "text": "So you would buy at a 4% cap rate in a 10% cap rate market because you are doing the calculation backwards.  How does that make sense?  What do you use your fake cap rate for?", "replies": [], "depth": 10}, {"id": "ebei5ed", "text": "&gt; I\u2019m an acquisitions officer for Blackrock.\n\nAnd you think a building would be valued at different cap rates because of occupancy?   Can you show me how that works at Blackrock for a 95% vs vacant building?", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "ebeh2ui", "text": "&gt;u/neuropat  \n&gt;  \n&gt; is talking about determining income on an acquisition - project income and divide by your purchase price.\n\nUmm,  Isn't project income NOI?  What are you trying to accomplish here or is this just busy work for him to keep him out of Dad's way?  Show me how two identical buildings sell at different cap rates based on occupancy?  Even he flip flopped on that.", "replies": [{"id": "ebehkhv", "text": "I bought a 100% leased office building for a 4.5% cap, and I bought a 0% leased spec office building for a 5.6% cap on projected NOI. I was able to win it at the higher cap because it was empty and takes more capital to lease up. What is so hard about this?\n\nMarket caps even fluctuate with occupancy in the market. If there\u2019s a glut of new supply reducing occupancy, cap rates will gap out.\n\nThis is painful. ", "replies": [{"id": "ebeiuf3", "text": "They obviously were not comparable properties to sell at different cap rates.  The lease up costs are a below the line adjustment.  Any commercial appraiser can tell you that.  Where did the 5.6% cap rate come from?  How do you know you didn't overpay since you did not have cap rate comps.  Geez.  Did you even use an income approach to value or just pull a number out of your ass?  Fake wannabees", "replies": [{"id": "ebgfbcv", "text": "The buildings were identical and located in Silicon Valley - phase 1 and 2 of the same project. DCF is more widely used by sophisticated investors. You have to project renewal probability, rent growth, etc. Yes TIs are below the line, but that affects your NPV not your cap rate. Cap rate is based on NOI, not cash flow. You compare purchase price to NOI (not CF) to calculate the cap rate. \n\nYou are just wrong. No one uses direct cap for investment analysis, you use DCF and need to understand exit cap and discount rate, and project CF over the hold period to calculate leveraged IRRs. ", "replies": [{"id": "ebggcom", "text": "Just ignore him... he\u2019s a troll. Check his post history. u/honobob has no idea what you\u2019re talking about - he just keeps repeating his same jumbled up jargon he learned from partially reading some text book at his tier 4 school. He doesn\u2019t understand how to evaluate an investment.", "replies": [{"id": "ebgjdd7", "text": "And yet I have shot down all of your statements and posed questions that you do not have enough experience to answer.  Step up and support your statements.", "replies": [], "depth": 13}], "depth": 12}, {"id": "ebgjujz", "text": "&gt; No one uses direct cap for investment analysis,\n\nThen why are you even involved in a discussion that you  are not familiar with?  The discussion started out with the incorrect statement that occupancy changes cap rate.  You both want to deflect from the core discussion because you thought you could bully someone but got caught up by talking to an actual expert.  I think you are losing your interned cred.  Ha Ha.", "replies": [], "depth": 12}, {"id": "ebgka2q", "text": "&gt; You compare purchase price to NOI (not CF) to calculate the cap rate. \n\nWhy would you EVER want to calculate a cap rate?  Investors don't do that!  Dividing one fake number by another fake number provides nothing. Yet with a NOI that started with PGI and market cap rate comps analyzed by a third party provider I can calculate probable market value.  You are just wasting your time thinking you are a big shit.  \"Yep, I calculated we be acheiving about an 18% cap rate on Grandma's doublewide!\"  Seriously, you kids were probably just taught to input some numbers in a spreadsheet without and training on what they mean. ", "replies": [], "depth": 12}, {"id": "ebglno3", "text": "&gt;The buildings were identical and located in Silicon Valley - phase 1 and 2 of the same project.\n\nYou still stated that they sold at different cap rates.  WHY?", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "ebglzew", "text": "&gt;I bought a 100% leased office building for a 4.5% cap, and I bought a 0% leased spec office building for a 5.6% \n\n$200,000 NOI bought at 4.5% cap rate is $4,444,000.\n\n$200,000 NOI bought at a 5.6% cap rate is $3,571.000.  \n\nNo seller is going to sell in a 4.5% market at 5.6% cap rate.  Geez.  Maybe you overpaid on the 4.5% transaction.  ", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "ebee2v0", "text": "&gt; that you\u2019re absolutely confusing principles in this comment thread. \n\nSuch as?  I can walk you through direct capitalization.  All you can do is show me how you learned it backwards.  ", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eb3u4nf", "text": "Good point! Not sure if it\u2019s JIB\u2019s business reason. But the location seems to be really good.", "replies": [], "depth": 1}, {"id": "eb3x4hp", "text": "If you provide the city, I can look up some comps on Costar. \n\nHey man, It looks like you're a bit in over your head. Why don't you give a good broker in your area a call. A local broker at a large firm like CBRE would probably take your call to answer questions no Strings Attached.\n\nIf you can't find one, call Brian Mulvaney at Voit and ask away, he will answer any questions you may have. \n\nBrian Mulvaney\n\nBmulvaney@voitco.com\n\nCell: 8589223372\n\nDirect: 8584583372\n\n\nP.S. Honestly, an expiring lease on a small freestanding building is too high of a risk IMHO. NNN is good, but make sure it's not on a ground lease. \n\nGenerally, those kinds of locations can be vacant for months. By the time the dust settles, I wouldn't be surprised if it turned into a 4 or 5 cap after you do all the financials and due diligence. However, Jack in the Box is really picky with its location, so it means it's probably a prime location. But really, you need a broker to help you even if it's NSA. If it was truly a 16% cap like stated, it wouldn't still be for sale! :)\n\n\"If it's too good to be true, it probably is\"\n", "replies": [{"id": "eb3xqd2", "text": "Yes I am overwhelmed with all these new info.  That\u2019s partially why I am here asking questions, lol.. this is a learning process and I am glad I find this forum.  Will consider contacting him. Thank you!", "replies": [{"id": "eb3yc76", "text": "13% cap rate is way too high, so it means it's either high risk or something else is wrong with it. \n\nJack in the Box is always picky as hell with location, so it might not be that hard to find another tenant, like a family owned mexican food place or something. The location is probably prime location. \n\nIdeally, you would call someone at Voit, CBRE, Cush&amp;Wake, and find someone who is willing to answer questions as a courtesy, and maybe find someone who can help you find the perfect property for your budget, and that fits what you want.", "replies": [{"id": "eb3zsns", "text": "Right! I am in no hurry, but trying to understand the perspectives.  Thanks again!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "eb5wgm4", "text": "If you can buy at a 16% cap rate and sell at a 2-3% cap rate you will make a fortune!", "replies": [{"id": "eb5x14v", "text": "I meant that if it stays vacant for a while, you're going to be paying for a building that isn't making money, and by the time you find a tenant, you will need to factor in the extra expenses and TI's when  the new tenant moves in and does their renovations (Likely for a freestanding corner drive through like that)\n\nJack in the Box has been historically very picky with choosing a prime location, so the fact that it was a Jack in the Box should give a little more confidence. If JIB will take it, anyone would. ", "replies": [{"id": "eb6kmks", "text": "But if the cap rate is 10% it will still be 10% later unless there is a change in the market.  His anticipated holding costs have no effect on the cap rate but on his offer price.  No one should be buying commercial property unless they understand this.", "replies": [{"id": "eb6qql7", "text": "Yes, you are right. This guy made it very clear he's in over his head. I don't really know how to explain that just because the cap rate is high, doesn't mean that's what his profit is going to be. ", "replies": [{"id": "eb6r9ht", "text": "There is no cap rate.  You need analyzed sales price to determine the selling cap rate.  The value by direct capitalization (cap rate) could very well be $5,000,000 but the below the line adjustment dropped the value to $1,295,000.  You cannot use that sales price to determine a cap rate.  If wee are assuming a $18,000 a month NOI then a value of $5,000,000 would mean that the market cap rate is 4.3%.  Where did 16% come from?  You do not understand cap rates.  I can explain them to you.", "replies": [{"id": "eb6rd5w", "text": "He posted the cap rate himself!\n\nHe said the price was 1.295M and the cap rate is 16% meaning his NOI is 207200/yr, divide by 12 for ~$17.2K/mo NOI.\n\nI don't know where HE got that cap rate from, but typically, we only see a cap rate that high if it's a pro-forma and the seller is flying too close to the sun, or if it's a ground lease that's expiring, etc. My first thought is \"What is wrong with the property?\"\n\nUnfortunately, there is no way to verify if his cap rate is correct without a location. Costar data is known to be pretty hit-or-miss outside California, but if he'd post an OM or an address it would help. \n\nYou're correct though, listing just the price and cap rate doesn't really mean much unless you really look at the rest of the financials.  The cap rate should come after all the expenses that come up. Taxes, TI's for the new tenant, property maintenance, etc. \n\nIf we see the number in Costar at 16% cap rate, it usually means there is something going on. Maybe deferred maintenance, like a roof becoming due for repair and the cost not being factored in. ", "replies": [{"id": "eb6sog0", "text": "&gt; You're correct though, listing just the price and cap rate doesn't really mean much unless you really look at the rest of the financials. \n\nWhat financials?  If you are going to use direct capitalization to value the property then you need current cap rate comps.  In this case the only reason to look at the current lease is to use against your rent loss til you think you can lease up.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eb40vg0", "text": "Get a good buyer broker. In your offer, include a clause saying you can market the property for lease while under contract. EVERYTHING in real estate is negotiable, be creative. Hire a broker, a good one is worth their weight in gold. At $1.3 talk to someone local either at a big firm or a broker-in-charge. If you have the money they will sit down with you", "replies": [{"id": "eb47hpo", "text": "Sounds like the overall cost will be expected a lot more than $1.3M.  I will still get more info on this, but would unlikely to make any move.  Thanks!", "replies": [{"id": "eb48pxr", "text": "Again, hire a buyer broker. Don\u2019t get someone new to the business. If you have money, you can get someone good. DM me if you can\u2019t find anyone local, I\u2019m in NC. If you are looking to invest over a mil, hire someone to invest it intelligently even if it\u2019s not this property", "replies": [{"id": "eb496h4", "text": "I definitely will reach out if needed. Thanks again!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eb4g67k", "text": "Be prepared to spend thousands on due diligence. You'll want to have a phase I survey, ALTA survey, title insurance, etc. Get an experienced broker, you'll need one. Cre isn't that complicated, but very expensive. ", "replies": [{"id": "eb4y8sj", "text": "Yes base on all of your guys inputs, I would expect the overall expense is much more than the cost for CRE itself.  I will find a broker first and learn all about these. Thanks!", "replies": [], "depth": 2}], "depth": 1}, {"id": "eb6pciu", "text": "$**1,295,000.  Cap rate 16%.**\n\nThese numbers are meaningless.  ", "replies": [], "depth": 1}, {"id": "ebdyb3x", "text": "There are at least a solid 40 factors we analyze when looking at real estate sites and the risk varies on any number of factors. I specialize in restaurant net-leased properties so I'd be happy to take a look at the site and give my insight on the deal. There is a lot to look for in the lease and I can also help you identify where the voids are with QSR tenants and help as needed. If you're interested, I'll share my email address or we can chat on the phone.", "replies": [], "depth": 1}]