LVR for big commercial properties

[Glenn]

Hi folks.
Got a question some experts might be able to help with.
I have a share of a syndicate in Wellington CBD.
It is in trouble.
We lost lots of tenants but relet almost all of it at less rent. We have the ground floor retail still sitting vacant.
Then when the bank saw the new capital value based on the reduced rents it wanted us to reduce the mortgage.
The actual building is very sound with an IEP of 80% of NBS.
What is the going LVR for multi storied buildings in Wellington CBD.

[DaveW]

You could get another registered valuation from a valuer who acknowledges that the rents are under value, but really it is not just about the rents. In order to secure the maximum 67% lending from mainstream banks your tenants need to be consistently strong, with minimum average weighted lease term of 5 years.

Why is the retail space proving hard to let?

[Davo36]

Glenn, I don't think there is an LVR specifically for one class of building over another.

I think they just basically use 35/65 or thereabouts for most.

Have you guys tried other banks? A different bank might be much better to deal with. For instance, a year or so ago I shifted from ANZ (who had become totally useless) to ASB, who are a lot better.

I have apartments in my building (3 res, 2 comm tenants), and so wanted to get the bulk of the borrowings at residential rates. Some banks like ANZ and Westpac wouldn't entertain it. They said it was commercial blah blah blah.

My point is only that another bank might look more favourably at your building, than you current bank.

The other comment I have to make is around rents and building values. As you know one impacts the other greatly. During the GFC in 2009 and 2010, I spoke with agents who told me that their clients couldn't afford to lease their empty properties, because the rent would be so much lower that their banks would then force them to stump up with more equity.

I guess, looking back, maybe the spaces were over rented at the start?

[Glenn]

The shareholders are starting to think the syndicate manager has lost it. Some of them are in another syndicate with same manager and they sacked them. There are rumblings of mutiny.
At $30000 a month debt reduction it leaves nothing for us needy sods. At the current repayment rate it will be 62% LVR April 2015. As you say ASB might be a good move. Not sure about the reason for no retail tenant on ground floor. Last one went belly up. When in Wellington recently there seemed to be a lot of ground floor tenancies with pet spiders as tenants. I think CBD retail in NZ has had its day. Buggered by destination malls with good parking and the on line trade.

[PTWhatAGreatForum]

I think CBD retail in NZ has had its day. Buggered by destination malls with good parking and the on line trade.

I agree.

Furthermore there are far too many retailers in NZ for the size of the population. Too many people trying to skim dimes on selling the same old crap.

Far better to concentrate on the productive sector.

[Davo36]

Glenn, yeah retail is a bit tricky at the moment, what with online sales and so on.

But it should be able to be rented at some price. It may be that all the rents have to be a bit lower for now, but can be slowly wound up over the next 6 years say to bring it back up to full value.

[Glenn]

Thanks Dave, Dave and Michael. Here I am doing this business for me and other people for years and years. I and the other shareholders are all prudent experienced investors yet our Titanic starts taking on water and we wonder where are the life boats. Then I cry for help and find you fellow experienced investors also make comments like "I think this and that".
It is all simple stuff but the numbers are so big it does not take much of a storm to make us start wondering if the captain is up to it. Just as well it is only a minor percentage of my portfolio.

[DaveW]

Davo, 3 apartments and 2 commercial in one building is definitely commercial lending. Even a block of flats with no commercial tenancy is commercial lending if over $1M.

Glen, CBD retail needs to be very addaptive to demands. Check the neighbouring tenants. Maybe it is suitable for office?

Clothes and food are not things people like buying online. Are the neighbours eateries and yours simply doesn't have a kitchen?

Do the neighbours want bigger or smaller space, can they be enticed to yours?

2nd tier lenders can be less conservative.

Syndicates are a pain in the ass.

[PTWhatAGreatForum]

Make sure your building is UFB ready.

[Glenn]

Make sure your building is UFB ready.

I like that. It has a huge 8 m satellite dish on the roof.
Who knows if the UFB world has found its way to Manners Street. If need be the tenants can set up a microwave dish to a near by hub.
I do not concern myself with the ins and outs of what sort of tenancy goes on there. I have hundreds of other tenancies I have to concern myself with. Some big but most small to tiny. I am just throwing the stupid issue out there for others to think about and make a comment on. Not really looking for solutions but generalizations.
We have a meeting later this week. Expecting some fireworks and a bit of milk on carpet if not blood.
Funny thing is I have for many years told others to avoid syndicates then do one myself. It just seemed to fit at the time. Just one of lots of jigsaw blocks of all sizes and shapes. It is just like the share market. If you can not afford the losses you should not be in the game.

[Bob Kane]

Manners St used to be an attractive part of town - probably when your building was built.
But now it's no-mans-land.
Dead, barren and tumble weeds.
Not your fault this has happened - no-one could have predicted it.
It might need a change of government and a huge increase in govt consultants needing offices to turn it around.

[PTWhatAGreatForum]

I like that. It has a huge 8 m satellite dish on the roof.
Who knows if the UFB world has found its way to Manners Street. If need be the tenants can set up a microwave dish to a near by hub.
I do not concern myself with the ins and outs of what sort of tenancy goes on there.

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.

[Glenn]

Manners St used to be an attractive part of town - probably when your building was built.
But now it's no-mans-land.

This is what happens to any building and town over a 6 year period. I did get the chance to publicly ask Sir Bob Jones what he thought about retail future in the area. He huffed and puffed a little bit as he does and said perhaps food is the answer. He wrote a scathing comment in a recent NZP magazine about syndicates.
His views are always extreme, instant, and scathing. That is why he has done well. In my small way that is why I also get into trouble for expressing my opinion. which is of course often different to other people's. The reality is when you throw your lot into a big investment (or small also sometimes) we as landlords are dependent on the skills, luck, and fortunes of our tenants. The bigger the investment the more remote the landlord gets from the coal face of being able to intelligently talk with the business owners of the tenancy. Be that a bank, multi branch business, or a multinational. Decisions are made far from us and frankly the rent is normally a fairly insignificant issue for them.
As Bob and many other people say. The CBD of our capital city has to survive. If it does not then the whole country is buggered.

[speights boy]

Was the LVR near its maximum when the syndicate was set up, assuming it was done so fully tenanted ?
If so, is there ability from the syndicate members to put more money in, if a suitable tenant can't be found in a hurry ?

[Glenn]

Was the LVR near its maximum when the syndicate was set up, assuming it was done so fully tenanted ?
If so, is there ability from the syndicate members to put more money in, if a suitable tenant can't be found in a hurry ?

The LVR was less than 50% in 2008. I made that very same suggestion of putting more capital in. Sir Bob's comment is very true. You get a syndicate and need more money. It is very hard to get everyone to agree to do anything. The managers try to hold it all together in order to make their pittance. An old account / syndicate organizer friend of mine many years ago made the comment. If you go into a partnership to buy property make sure one of the shareholders has lots of money. That way if you need more capital that shareholder can increase his share and save the day.