building in SW ontario- does this deal make sense? 2.0 updated deal option
Hey Guys,

I really appreciate the feedback. I decided against the deal. The Realtor brought up an interesting counter-offer.

The Landowner also owns a 6 unit (12,000sq) retail plaza (mostly retail, 2-3 small manufacturing) 

Total rent is 170,062.20 (tenant pays taxes)

I used a liberal $10,000 for insurance

5% maintenance (of total rent) $8503 (the building does not require any major work, obviously will get a proper inspection)

Management fee (which I would pay myself): $1,000/month

Total costs: 30,503

net to me: $139,559

the current asking price is $1.65M leaving a 8.5% cap rate

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The deal is: I can put a lower offer on the land and make it a package deal.

As a quick summary; the land is listed at $279,000 and makes $12,000 (storage rental), I would assume $2000 in taxes

If I was to pay asking price for both (which I won't), I would be getting a cap of (149,559/1.929M) of 7.7%.

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With this deal, the land itself seems like a solid deal. On the other hand, I could just buy the retail plaza and get a 8.5% cap rate. 

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Some general comments:

This is a small-er town There are no AAA tenants. I have been looking for other small plazas in the area to compare cap rates but can't find anything. Does anyone have any thoughts on this? 

Thoughts on the deal over all? 

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Once again, I appreciate all the great feedback.
[{"id": "ghs956i", "text": "What are the tenants? How long are their leases? Are they paying market rents, or above or below market? How long have the tenants been there? This information would be critical for me to understand.", "replies": [{"id": "ghsjug6", "text": "The tenants have various retails (3 units to one construction retail store),2 do some sort of manufacturing and the 6th also retail construction products. \n\nRent is a bit of a mixbag, but has potential to be increased. For example, the one renter currently rents three units unit at $14/sq, $9 and $11/sq. He has increased his footage over the years. \n\nThe lowest rental available in the market is $9+NNN, but is inferior to this building. The average market rate is $11-14/sq. I would say due to the location this would be in the middle.\n\nFrom my understanding, the one tenant (with 3 units) has been there for over 5 years while the others are well into their leases. \n\nMost of the leases are up for renewal in the next 2 years. \n\nI wish I had more info, but the sheet I got has only those three sq of units listed and for others does not. The above values are based on the $/sq I was able to calculate for the 3 units that they did provide numbers for.", "replies": [{"id": "ghspllr", "text": "Ideally you want to use this information to build a present value assumption model for 10yrs worth of cashflow. You\u2019ll want to factor in all known, assumed, or potential expenditures and all income after having accounted for potential vacancy resulting from lease expiries and tenant failure/default. This will give you the best idea of the potential returns. You can use this to build in debt assumptions and determine what your levered IRR might look like.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ghtp28c", "text": "Per your comment on other post, everything rolling over in next 2 years is risky. What is marketnvacancy like / what could you rent at a competitive property? Retailers don\u2019t like to move BUT retail has been pretty beaten up recently. If the tenants are smart they could hold a gun to your head, retail leasing is tough, double so in a secondary / tertiary market &amp; triple so in the age of COVID. Add in a small space too and if like your main guy blows out you could be hurting.\n\nWhat is the mix of retailers in the plaza? Honestly an 8.5% on near term roll in a secondary market seems too rich on face value, secondary market and class B/C retail was trading at that level pre-covid.", "replies": [], "depth": 1}]