LVR for big commercial properties

[speights boy]

Does the syndicate agreement have some sort of banking covenant breech clause in it ?

[Davo36]

These syndicates are for sale on an ongoing basis I think. Saw a couple in the Herald a fortnight ago.

I was wondering how they manage to find these buildings and buy them cheaply enough to be able to then turn around and sell them in small bits at good cap rates.

And I think the answer is that they use gearing to amplify the return. I'll do a for instance:

Method 1) Buy a property for $1million cash, it returns $80,000. So it was bought on an 8% yield. ROI is 8%.

Method 2) Now buy the same property but with $500k cash, and $500k borrowed at 6%. Still 8% yield but ROI is something like $80k - $30k = $50k/$500k = 10%. So now you can sell 6 bits of it off at $100k each (pocketing $100k in the process) and they each will have a return of $8333 or 8.3%.


Is this what they do in practice?

[Norwest]

This answers a lot. A lack of flexibility and foresight is your achilles heel. Out of touch in other words.

You're screwing around with trying to attract retail and old-world business which is already well served for space, all the while being blind to the growth of small (1 - 20 employee) new-world businesses who often operate in a non retail environment in lower cost 1st+ floor office space in CBD and fringe locations.

These businesses demand fibre UFB and your talking clap trap about satellite and microwave.

MichaelNZ, you are the one who is out of touch if you think Manners St does NOT have access to fibre.

[PTWhatAGreatForum]

MichaelNZ, you are the one who is out of touch if you think Manners St does NOT have access to fibre.

You misunderstand the post. It's not about whether fibre is in the street, it's about whether the building has UFB installed.

Speaking from the position of running a business heavily reliant on Internet, I'd always prefer a building which is UFB ready. It would save me the waiting time and hassle of the paper work to get it installed. Furthermore, if a landlord started a spiel about satellite dishes and microwave (wireless internet), I'd quickly give them a miss. It indicates to me they don't know what the hell they are on about and are out of touch with today's commercial realities.

It's up there with residential landlords who don't install a phone line because they think the tenant should use their cellphone. Fine for them, they're not paying the bill for such silliness. It's on a par with me saying a tenant couldn't have a Sky dish or UHF aerial because I don't care about TV (which is true).

[Glenn]

Davo
Not completely with this building but they did manage to wind up the price by the vendor renting a couple of floors at the beginning.
That produced 12% net after management and all other costs for the first four years. I looked up what the vendor had paid for it and he was making an indecent profit. The agents had a plausible reason for the low price. Like he purchased it with lots of vacancies and it needed lots of refurbishment.
No the key to our problem was the anchor tenant with naming rights did not renew their lease. They went from six floors to one. As some people say "the world tipped on its axis".
But that was the point of Sir Bob. He claims that 80% of his major expenditure is unplanned. That does sound a bit over the top (normal for him) but this is what owning properties is all about. We take the risk.
Incidentally since posting we have been scratching through the mountain of paper the managers have fed us over the years. Found the bank document that specified no money to be paid out to stake holders for three years and LVR was not to go below 65%. So we have been down in the water and I can feel the big ship starting to rise up.
Apart from tenant issues just think what the change of depreciation on $ 18 M does for the end of year result.

[PTWhatAGreatForum]

Davo
I looked up what the vendor had paid for it and he was making an indecent profit. The agents had a plausible reason for the low price. Like he purchased it with lots of vacancies and it needed lots of refurbishment.
No the key to our problem was the anchor tenant with naming rights did not renew their lease. They went from six floors to one. As some people say "the world tipped on its axis".
......

Apart from tenant issues just think what the change of depreciation on $ 18 M does for the end of year result.

Sounds like the merry world of capitalism.

[Bob Kane]

Is this what they do in practice?

That's exactly how it was set up in one that I dabbled in.
You had to look a bit deeper than the glossy sales spiel to find it.
The wonderful 10% return lasted for about 7 years.
It's now a realistic 5%.

[Maccachic]

Glen might be time for the syndicate to bring in a professional valuer? To look at opportunities / lease mixes / feasibility studies etc?

[Davo36]

Glen might be time for the syndicate to bring in a professional valuer? To look at opportunities / lease mixes / feasibility studies etc?

I disagree with this.

I couldn't think of a property professional less likely to be of any use. May as well ask the tea lady. Valuers are overly cautious IMHO.

A real estate agency would be better. Someone like Bayleys, or Colliers etc.

[Davo36]

That's exactly how it was set up in one that I dabbled in.
You had to look a bit deeper than the glossy sales spiel to find it.
The wonderful 10% return lasted for about 7 years.
It's now a realistic 5%.

OK thanks Bob, I have always wondered about these things.

[Davo36]

Davo
Not completely with this building but they did manage to wind up the price by the vendor renting a couple of floors at the beginning.
That produced 12% net after management and all other costs for the first four years. I looked up what the vendor had paid for it and he was making an indecent profit. The agents had a plausible reason for the low price. Like he purchased it with lots of vacancies and it needed lots of refurbishment.
No the key to our problem was the anchor tenant with naming rights did not renew their lease. They went from six floors to one. As some people say "the world tipped on its axis".
But that was the point of Sir Bob. He claims that 80% of his major expenditure is unplanned. That does sound a bit over the top (normal for him) but this is what owning properties is all about. We take the risk.
Incidentally since posting we have been scratching through the mountain of paper the managers have fed us over the years. Found the bank document that specified no money to be paid out to stake holders for three years and LVR was not to go below 65%. So we have been down in the water and I can feel the big ship starting to rise up.
Apart from tenant issues just think what the change of depreciation on $ 18 M does for the end of year result.

Glenn, the old "Vendor leases the property and sells it" is the oldest trick in the book and the first one to look for in the C&I world. If they have to lease the whole or part of the property themselves, it means a) They can't find a tenant, b) Whatever they are paying will almost certainly be over the market value for the space and c) They will vacate it as soon as they are possibly able to - and often before - just walking away from the lease after settlement - leaving the purchaser to chase them through the courts.

[PTWhatAGreatForum]

Davo
Not completely with this building but they did manage to wind up the price by the vendor renting a couple of floors at the beginning.
......
But that was the point of Sir Bob. He claims that 80% of his major expenditure is unplanned. That does sound a bit over the top (normal for him) but this is what owning properties is all about. We take the risk.

OMG. You claim to quote Bob Jones and yet you forgot the lease-hydraulicing strategies so clearly outlined in his book?

A few months ago I looked at a factory + shop + accommodation unit for sale, which I was interested in for my business. The vendor gave me a full tour and a long spiel about how great the building was, how good a location it had been for his business and what a spendid opportunity it would be for me to buy the whole property (3 units) rather than just the one I was interested in. So after I had heard all of this, taken lots of photos, hummed and hared (in my mind) over whether I really wanted to cross over to the dark side and become a landlord myself, I asked him the price. The price he quoted me was way over the top like his claimed rentals.

Really nice guy tho'. Almost too nice. It wasn't a surprise when he tried to pull one over me.

[King13]

These syndicates are for sale on an ongoing basis I think. Saw a couple in the Herald a fortnight ago.

I was wondering how they manage to find these buildings and buy them cheaply enough to be able to then turn around and sell them in small bits at good cap rates.

And I think the answer is that they use gearing to amplify the return. I'll do a for instance:

Method 1) Buy a property for $1million cash, it returns $80,000. So it was bought on an 8% yield. ROI is 8%.

Method 2) Now buy the same property but with $500k cash, and $500k borrowed at 6%. Still 8% yield but ROI is something like $80k - $30k = $50k/$500k = 10%. So now you can sell 6 bits of it off at $100k each (pocketing $100k in the process) and they each will have a return of $8333 or 8.3%.


Is this what they do in practice?

Yes...and then the syndicator takes a fee to 'manage' the syndicate. They (usually) do not own any of the units, so they take no risk!

[Davo36]

Yes...and then the syndicator takes a fee to 'manage' the syndicate. They (usually) do not own any of the units, so they take no risk!

Yep, they seem to make a largish amount at the beginning and then have an ongoing income via the management.

[Glenn]

I disagree with this.

A real estate agency would be better. Someone like Bayleys, or Colliers etc.

You are getting hot.
I just wonder how these firms can have their own "independent" valuers. Not cheap either. It costs $5000 for a valuation.
A bit more than the typical $800 I pay for a simple one story building locally.