Commercial property transactions can be complex and require detailed analysis and care right from the due diligence stage to the deal structuring and closing phase.
The first step in the process is assessing a deals attractiveness. While less experienced investors would be strongly advised to consult with professional advisors before investing, there are certainly early indicators that can be sought to assess if this particular deal warrants further inspection.
Tenant:
When purchasing a building with a tenant in place, the identity of that tenant is of serious importance. The tenant isn’t simply living in your building, but 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 more importantly strength of the businesses of each of your Tenants.
Whereas 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.
Losing a tenant and suddenly finding yourself with a vacancy to deal with can lead to serious ramifications for your investment.
Lease:
If your tenant, or more specifically anchor tenant, should fail or move out at the end of its lease, the building as a whole may require restructuring and retrofitting or, at a minimum, some downtime until a new anchor tenant can be found.
With this in mind, you, as the potential owner, are looking to see as long a period of time as possible remaining on the lease. Ideally, you want to have initiated your exit strategy before any new lease is required as this will mitigate any risk of being left with a large vacancy.
Market:
The investment documentation will most likely include a market analysis detailing the current environment and how the investment sits, or will sit, within the market. This is vital and warrants a thorough investigation by the potential investor. Are the figures taken from a reliable source? Are the figures relevant? Is the report based on assumptions, or true analytical data? Is the data current? Does it relate to the correct market?
Sponsor
Like all property investment opportunities, ultimate success truly rests with the sponsor’s ability to perform as planned. Their experience, and preferable success, in the market place is obviously the best indicator of the likelihood and one should be on the look out for a strong bio. In addition, one would like to see the sponsor contributing a percentage of the required equity themselves. This is a statement of their confidence in the deal, as they are not only risking your money, but their own.
MetLife Inc., the largest U.S. life insurer, said there are signs of a recovery in the commercial real estate market after property values dropped about 40 percent from their peak.
“We have seen a pick-up in office-leasing activity compared to last year, and hotel occupancies are starting to improve,” Chief Investment Officer Steven Kandarian said today in a conference call. “We believe commercial real-estate valuations have bottomed out.”
MetLife is benefitting from a rebound in its investment portfolio after posting three quarterly losses last year when assets declined. The New York-based company posted first-quarter profit of $835 million yesterday, the most since 2008, as holdings backing insurance policies gained in value.
MetLife has about $35 billion in commercial mortgages and more than $16 billion in securities backed by such loans. Kandarian joins Larry Zimpleman, chief executive officer of Principal Financial Group Inc., in saying the market may be improving.
“Smart capital is starting to queue up” to invest in commercial real estate, Zimpleman said this week in an interview at Bloomberg headquarters in New York. “Prices have now sort of bottomed out and have actually started to slowly move back up again.”
REF: Bloomberg
