I wanted to begin showcasing how Investart can help with your property acquisitions using a live deal. I found this deal on Crexi. It is a relatively small deal, multi-tenant building. Creating a financial analysis would be time-consuming, potentially leading to this property being overlooked. Could this be a hidden gem? We can quickly find out using Investart.
This investment opportunity creates the potential for a couple of different approaches. On the one hand, you have a tenant that appears to be paying rent despite not operating their business due to Covid. On the other hand, the OM states that the building could be delivered vacant. One of the things that I would look at closely is how the rent collection has been going. There is the genuine chance that the tenant just simply hasn't been paying rent, or at a minimum, the leasing entity's financial standing would have been weakened. Making this assessment would be the biggest determinant if the investor should ask for the property to be vacant or not.
Assuming that the tenant is making the payments, this investment strategy would be the most straightforward with less risk. The investor would enjoy an unlevered IRR of 8.81% and a levered IRR of 12.77%. We are assuming a purchase price as advertised of $4 million plus $50k for closing costs and an exit cap of 6%. Leverage assumptions are 60% LTV with a rate of Libor plus 450 points. The Debt Service Coverage Ratio (DSCR) is above 1.5, which is typically considered an acceptable range, except in the years with a vacancy. The lender will more than likely require that reserves be held in order to account for these drops in cash flow. Below is a sensitivity table that can help the investor assess the risk of the investment:
Alternative: Vacant Building
If the property is delivered vacant are a couple of benefits that the investor would enjoy. From the OM, it appears that there are no annual rent escalations in the current lease. With the lease running until 2024, this alone would be a huge benefit. Secondly, raising the rent to $2.25/SF is a reasonable assumption even in this climate. Lease rates in the more centrally located areas of downtown go for $3.5-4/SF.
Using this strategy, the investor would enjoy a jump of almost 350 basis points in Unlevered IRR to 12.35%. Levered IRR would be 19.26%. For this scenario, I included a 12 month period of Interest Only (IO) since there would be an initial vacancy. The DSCR is around 3, which is more than sufficient. One thing to note is that in year 6 when the vacancy hits the DSCR using cash flow drops to negative. If you are holding reserved for TI’s and commissions and are not funding those with cash flow, then you are fine. Otherwise, you would need to hold reserves for this anticipated drop in cash flow. Below is a graphic depiction of DSCR and a sensitivity table, both of which are standard in the Investart dashboard:
This investment opportunity seems an ideal candidate to explore further. Visiting the site and visually inspecting the site should be a natural next step, particularly to assess the structure and any deferred maintenance. The analysis includes some plugs for Capital Expenditures. However, checking all the systems is crucial to get a more accurate number for the costs. Finally, I would then look at what businesses have survived the pandemic and which bars in the area remain viable. Is the bar/restaurant still viable in this area now that the business interruptions due to covid seem to be ending.
This analysis is meant to be an example of how Investart can help an investor analyze a property. It is not meant to be an endorsement of the investment itself. The first link below will give you a full property report with all the information used to perform the analysis. These reports are created automatically within the platform, and you can add your own logo and color scheme.
If I have piqued your interest, take a look at the models for this property, the second and third links. You’ll need to sign in to your account and then click the links, and a copy will appear on your account. For any questions regarding the property, please contact the listing broker, which can be found in the last link.