Due Diligence is the disciplined process you use to lower the risk of investing in Commercial Property. This risk typically comes in four “flavors” when you are investing in Commercial Real Estate.

• Market Risk: Will the fundamental conditions of this market allow me to meet my return on investment (ROI) goals?
• Financial/Performance Risk: Does the projected financial performance of this property meet my ROI goals
• Tenant Risk: Will these Tenants allow me to meet my ROI goals?
• Physical Risk: Will the physical structure of this property support my ROI goals?

The third area of risk… Tenant Risk… deserves special attention when you are buying Retail, Office and Industrial Properties. These property types carry an additional layer of risk you don’t see in Multifamily because your Tenants aren’t just living in your building… they are doing business within your Property.

Their ability to pay your rent is predicated upon the health of their business and not just on their ability to draw a paycheck.

In order to lower your Tenant Risk you must understand the nature and strength of the businesses of each of your Tenants. Where in Multifamily you might stop at reviewing the Tenant’s background check and payment history… in Retail, Office and Industrial you have to go further and really research the viability of each Tenant’s business. This has never been more important than in today’s economy.

No matter what your Lease says, if your Tenant goes out of business, you will have a vacancy to deal with.

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Researching your Tenant’s Business has several steps…

1) Start with researching the businesses on the Internet.

a) Place the entire business name in quotations (like this: “International Outfitters”) and search on Google. See what shows up.

b) If the company is publicly traded, research their stock prices, analyst opinions and earnings projections. Call the corporate office and see what their plans are for this branch.

c) Do the same thing with the names of the owners and CEOs. Google them in quotes again… like this… “John Doe”

2) Ask each Tenant for current Financial Statements and analyze those carefully to get an idea of the business’ recent and past financial performance.

You won’t always get the financials from a private business owner… and you can always ask. What trends do you see in the financials in the last 6 -9 months?

3) Call each business Owner/Manager and arrange a sit down, face-to-face interview.

One logical time to ask for this interview is when it’s time to go over the Estoppel Letter and confirm its contents. While you’re discussing the Estoppel Letter, you can question them about:

• The strength of their business
• Their outlook for future business
• The challenges they see on the horizon
• How you might help them improve their business when you take over as their landlord

Make note of any concerns you have about the business strength of any of your Tenants.

4) Sit down with your team and discuss ways you could help the business of your current Tenants and mitigate against the loss of any of your weaker Tenants.

The goals here are to help when you can and have contingency plans in case any of your weaker Tenants goes out of business. Identify the businesses with the highest risk of failure and make sure you and your team know what you’re going to do if they actually do cease to be one of your Tenants. AND make sure you create proformas with and without the income from your weaker Tenants.

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You must perform these specific Tenant Due Diligence steps at the same time as you are completing the activities of Market, Financial and Physical Due Diligence for one simple reason…

You could be in the best property, in the most stable market with a glowing Proforma… and if your Tenant’s business falls apart… you will potentially lose money. Take the steps we have outlined here and you will dramatically reduce this Tenant specific risk.

AND never be afraid to walk from a deal if the Seller is not willing to discount the property because of Tenants at high risk of business failure.

Here’s to your investing success,

No-Hype Commercial Real Estate Training   |  Follow me on Twitter for the latest ]]> http://the-commercial-investor.com/commercial-property-tenant-due-diligence-secrets/feed/ 0 http://the-commercial-investor.com/commercial-trend-alert-pop-up-shops-a-win-win-in-hard-times/ http://the-commercial-investor.com/commercial-trend-alert-pop-up-shops-a-win-win-in-hard-times/#comments Tue, 24 Nov 2009 12:38:48 +0000 Dike Drummond http://the-commercial-investor.com/?p=432 With Retail Property in the tank across the nation … a couple week’s rent is WAY better than nothing at all. Retailer business owners are in an equal scramble to make a buck from the shrinking consumer spending pie … and Time Magazine is reporting that this is leading to some creative win:win solutions across the country in the form of what they are calling “Pop Up Shops”. Here’s the skinny …

The value proposition:

• I will rent your space for a couple months and give you some extra cash flow
• If you let me try out a new retail concept without having to sign a long term lease

And the “Pop Up Shop” is born.

Now we have all seen these types of stores before. You know the ones … the Halloween Costume shop that pops up for just a couple weeks in October. And any number of holiday focuses shops at Christmas – the Hickory Farms store anyone? The difference now is this is a real main stream trend.

Examples:

• ToysRUs is opening 350 “Holiday Express” toy outlets nationwide
• American Eagle is opening a store for only 77 days in Pittsburgh to sell its “77Kids” brand clothing
• Ann Taylor is opening similar pop ups in NYC

If there ever was a time to try out a new retail idea without having to pony up for a long term lease … this is it.

Here’s the full article

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I thought to myself, “This really is a sign the end is near – meaning it is seriously time to buy!” I have never seen anything like this before. Sure, the “no money down” guru crowd does a lot of work with TV… but that’s usually late night infomercials … and yes I do own a Carleton Sheets course from the 90’s.

Then today I saw the same ad in the Wednesday Wall Street Journal – a half page spread in “The Property Report”. That’s more like it.

Here’s the website for the auction. They have no less than 9 empty Home Depots to move.

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All the experts lamented the puny deal volumes this year and none of them seem to have a clear prediction of when deal flow will pick up however …

When asked, “How would you invest $3M in this Market?” Here is what they said …

Most responded that they would look for small, quality assets. May said that he would buy good core real estate on the west side…small retail that has long-term potential. “I am seeing a flight to quality,” he said.

Salis said that a lot of the volume that you are seeing right now is on the residential side, such as the 10- to 25-unit multifamily projects in infill locations such as Anaheim or Santa Ana, so that is a place he would look.

Roth would also look for quality. “The nice thing about quality properties is that there will always be tenants who want to park themselves there ”

Click here for the full article

Costco has 535 stores currently and  usually builds another 25 – 30 per year.

Click here for the full article…

Great minds think ….

Here is the full post

On Monday the WSJ reported on loan default rates for loans from the Small Business Administration to franchisees. Here are the top seven companies in terms of loans in default  and I sincerely hope these aren’t your tenants. If they are … it is time to take them out for a cup of coffee and discuss these numbers and their financial stability.

NOTE in some cases over half of franchisees who originated loans from 2001 – 2008 are in Default. Here’s the list …

• Mr. Goodcents – 55 defaults = 55% of loans originated from 2001-2008
• Philly Connection – 63 defaults = 51%
• Cottman Transmission – 165 defaults – 49%
• All Tune & Lube - 81 defaults = 47%
• Cornwell Quality Tools – 55 defaults = 42%

Also on the default radar are two biggies in terms of absolute number of defaults

• Quiznos – 108 defaults out of 1,963 loans
• Cold Stone Creamery – 75 defaults out of 763 loans

Give them a call today.

The extent of the creative Lease Re-writing going on out there was revealed in a Globe Street Article on February 9th. Looks like the new rules say, “Do what you have to  …  to keep that Tenant”  … and prevent the slippery slope of vacant storefronts in your mall.

• Discounts that accrue as a loan – with or without interest
• Rent Hiatus or Rent Forgiveness – NOT recommended
• Shorter Term Leases to get the building rented up

Read the full article here …

There are some bright spots in Retail as reported in a Globe Street article this week. And these could be the only bright spots in Retail Real Estate this year …  it is worth taking a peek at this list.

Overview:  “Though the International Council of Shopping Centers predicts that 150,000 stores will shutter this year, the association also noted that between 105,000 and 110,000 stores will open in 2009″

Here are some of the companies opening new stores this year – they fall in to several categories … Discount, Foreign Companies with their first US stores, services and food. Check it out … this is a very interesting list.

• Foreign:
  • British designer Karen Millen
  • Swedish chain Filippa K
  • Canadian store Aritzia
  • South Korea’s Who A.U.
  • Japanese Uniqlo
• Discount:
  • American Apparel
  • The Buckle
  • Cato 
  • TJX which includes TJMaxx, Marshalls, Winners, HomeGoods, TKMaxx, AJWright, and HomeSense
• Food:
  • Panera Bread 
  • Tesco’s Fresh & Easy concept 
  • Wal-Mart also is joining the fray, opening smaller stores 
  • Harris Teeter 
  • Wegmans 
• Services – daycare:
  • Crème de la Crème 
  • Children of America
• And Others:
  • Flip-Flop Shops
  • Gateway Newsstands
  • lululemon athletica
  • Cabela’s
  •  Monkey Joe’s

Hope your next project includes one of these anchors. Here’s to your investing success.