Leveraging a Rent Roll

It is well known that Lenders have always favored fully rented properties. In the past, if the rents were coming in no one had any real issues with who the tenants were.

Unfortunately, COVID changed all of that.

With the rent deferrals we had during the lockdown and what seem to be permanent negative impacts on certain types of businesses, the makeup of a property’s rent roll can make a difference in the amount of a property loan, or in the rates the owner can secure. Either of these advantages drive a direct increase in the final NOI and resulting cap rate your buyer will attract. As a buyer’s agent, knowing this, and what to look for, can give you and your client an advantage in your purchase strategy.

Given the choice between two similar properties, if you, as the buyer’s agent, can identify the stronger renter profile, you’ve added value your competition can’t.

Similarly, when your buyer is going to replace the current occupant(s) with a stronger tenant immediately or move their own stronger operations in, the property will be of more value than the seller is building into their asking price.

Effectively you are acquiring the property for a slight discount which can be built into your purchase planning.

For Example

Given a $9 million property, where the occupancy profile can be leveraged with the purchaser’s lender to secure just a 10 basis point reduction in the mortgage rate, over 5 years your client has brought in saving of $43,323.

Assuming an average annual savings of $8,665, your client has reduced the property’s NOI by the same amount, increasing the cap rate.

Your client could actually increase their bid for the property by up to $40,000 in a competitive bid process and still be slightly ahead.

The same applies if the stronger occupant profile can be leveraged to a slightly higher loan to value.  At just a 2% increase your client is saving $18,000 of their own equity; money that could be put into rent incentives to bring in that stronger tenant or to increase the purchase offer without calling for any more of the buyer’s funds.

Occupant Profile

There are a number of factors that contribute to the strength of an occupant profile:

  • business type/industry (very important post-COVID)
  • financial strength
  • any advantages the property location adds to the tenant’s business
  • number of employees that will utilize the property post-COVID
  • ownership
  • credit history

All things that as the property owner your client should want to know for themselves as the landlord.

Extra Step

Is this analysis of the rent roll more work in your property search? Absolutely.  But as you can see, it can have a material impact on your purchase strategy to get the best property for your client at the best price.

And it’s a step your competitors will likely not do. 

Identifying additional value and using that in your purchase strategy – it clearly makes you stand out from your competition.

Need Assistance

If you’d like help assessing the strength of a rent roll or a single occupant or advice on how to best utilize that information with a specific client purchase strategy, feel free to contact us any time.

Vender Support Solutions

In these times businesses are shifting their practices in hopes of coming out the other side with a profile that meets what will be the new normal.  Place of business and what that looks like plays a major part of those plans.

Buyers are more uncertain of what they want than they were before the pandemic. This creates challenges.

The more flexible your sellers can be with your prospective buyers the more likely you can bring in a sale that delivers top dollar for that property. Flexibility however should not mean a reduction in your seller’s profits.

One way to increase flexibility while maintaining profitability is through the new approaches to vendor financing support or “VFS”.  A long way from the old high risk vendor takebacks of yester year, VFS is a concise analysis that determines what specific form of support an individual buyer needs and structures around it.

Some of the most common forms of VFS are:

  • Short term debt servicing support  (the most common)
  • Direct payment performance during a move-in or rent up period
  • Renovation financing
  • Loan to value accommodations    

VFS is typically short term in nature and should always add to the profitability of the overall sale transaction for the seller   Often VFS sees the seller teaming up with 3rd party lending partners utilizing their fund and limiting the impact on the seller’s cash flows.

Structured and managed by established professionals, VFS transactions carry all the rigger and credit risk analysis applied by any major bank or institutional commercial real estate lender.

As a professional commercial realtor, it is your job to provide the best advise and to bring the best tools to your clients. VFS solutions should be one of those.

Considering Alternative Solutions

The world after COVID is not the same and will not likely return to what it was.  The place businesses will run their operations out of is one of the more challenging questions they are facing. 

Both property owner and tenant are looking for flexibility and terms they can live with over the next 5 years. 

We recently advised on a transaction where a distribution company was looking to acquire their own building.  One that was large enough to allow them to expand as a local distribution centre offering same day and next day deliveries for on-line retail clients. 

Debt servicing was not a problem as the client’s revenues were actually increasing with the new distribution centre strategy. However, the company did not yet have the equity base to secure a mortgage for the size of property they were looking for.    

Rather than purchase a smaller building and go through a property sale and yet another disruptive move in a few years, the decision was made to find a tenant to rent out part of the space in the short term (2 to 3 years). 

The rent would add even more debt servicing capacity for the mortgage but did nothing to improve the lack of equity in the prospective new owner. 

Our solution – offer the rent at a reduced rate in return for having the tenant utilize its equity by way of a guarantee that could be added to the buyer’s own equity position. 

The tenant, a small manufacturer looking for additional inventory storage space was able to get a far more flexible lease, at better rental terms, simply by using its idle equity to generate a rental benefit that improved its own net profits.  

The transaction was a win-win for both sides because they were willing to look at something new, at a time where it’s too important not to at least consider alternatives. 

The same structure and security positions created for this transaction can be used for retail, commercial or office transactions.   

Is It Time to Move Up

Residential rental properties have long been a haven for investors to buy, operate and secure solid returns. However, that was when we had a less volatile housing market. With the recent escalation of housing prices, but no corresponding increases in rental rates, properties that once cash flowed to a positive annual return no longer deliver positive returns to the investors.

Yes, your current properties have certainly escalated in price, but where will you invest your profits when the next rental property opportunity is not available.

An alternative can be moving up to small apartment buildings or small residential complexes. Residential investors collectively represent an enormous amount of equity, which, when brought together in groups of 3 to 8, can be used to secure smaller complexes, as your introduction to this new-for-you housing class.

Historically apartment investments have done extremely well.  Even through the challenges of COVID most multi-family properties provided to be far more resilient than the experts predicted.

For some, apartment investments can be a much longer-term investment within their portfolios.  They can create a diversification element for that investment pool that is your retirement.  

It’s important to remember, however, this jump does not come without its challenges.  The scope of property maintenance and tenant management multiples with each unit in the apartment or complex.  There are things the investors need to learn in order to achieve the past levels of success they had with individual properties.

In the last while we have seen new and interesting combinations of financing and property management that are delivering well thought-out structured solutions to help investors step up into this next-step asset class.  These multi part programs can provide everything a small collective of investors need to succeed in their initial years as multi-family property owners; from legal ownership structures, to funding, to tenant management.

If we can help you with you “Move Up” please let us know.  Simply leave your contact information in the section below and we will back to you as quickly as possible.

Can office sublets become a new entry point for the residential investor to enter into commercial property management.

Coming out of COVID lockdowns many companies are finding they will be downsizing their offices. These decisions are being made to allow many of their staff to continue working remotely. The result is a growing amount of space available for sublet, often at a substantial discount.

These sublets can actually create a unique opportunity for a residential investor to experience commercial property management with limited downside risk, given the “bite size” of the investment as well as the fact the investor can simply choose not to renew at the end of the term with no penalty.

How It Works

A sublet typically carries remaining terms from 3 to up to 8 years.

At $25.00 a sq ft, a 4,000 sq ft space will cost the investor $400,000 for the lease assuming a remaining term of 4 years. However, if the investor can take over the space at a discount from the original tenant at say $20.00 sq ft (a 20% sublet discount), the investor stands to realize a gross return of up to $60,000 on the property.  This presumes the investor is able to re-let the space at the original $25.00 price, based on the additional effort the investor puts in to find a new tenant.

The investor may be able to further enhance their profits if they take on the responsibility to complete any redesign and/or refurbishment the space may require.  

Subject to the investor’s own financial position financing for a transaction like this can range anywhere from self funding to 100% financing, with numerous potential options in between.

What It Delivers to the Investor

This subletting program is a unique market opportunity coming out of the COVID upheaval.  The program can deliver numerous benefits to the investor including:

  • Controlled entry into commercial property investments,
  • Flexible financing options
  • Easy access to professional property support, if desired
  • Dependable monthly cashflow