Commercial Property Case Study

Posted 2 Sep '22

Case Study: Commercial

by Nick Gentle on
Article appears under: About Property Investment, Case Studies, Due Diligence, Investment Strategy, Retirement, Your Expert Team, Commercial Property


Background

iFindProperty has helped residential property investors to buy value-add, off-plan and cashflow investments around New Zealand via our buyers agency services for 15 years. Since the Labour Government removed tax-deductibility for residential property investors, more and more we have been asked to help investors transition to having some commercial property in their portfolios. 

Commerical property is a different proposition to residential, and many investors, while keen to make a move, are nervous about jumping into something new. Our client was no different and today we share our process that started with "help I don't know where to start", and finished with a much more savvy purchaser landing two deals that perfectly fit his goals.

The Client

Our client had built up and sold a business and wanted to invest the proceeds in commercial real estate. His goal was not so much adding value and creating equity, he had achieved that outside of real estate. He wanted to put his hard-won capital to work to generate a passive income. 

A successful businessman, he realized he didn’t know where to start and saw value in hiring an expert to assist with such a major transaction. 

The Specialist

Peter Ambrose has been investing in property since the 1990's and for many years has been both a property and business coach. He is an expert at helping investors to both define their strategy and follow the steps needed to secure a deal. 

Defining the Goalposts

There are many different types of commercial property, so my first steps were to coach him through that and see what would fit his goals, risk appetite and budget. The budget he had in mind was about $5,000,000 total spend.

After discussing the pros and cons of various approaches, we decided on the following:

  • Must be a stand-alone building to control land
  • Wanted "turn-key" because he is time-poor
  • Must be industrial or warehousing
  • Happy with 1 or more buildings
  • Open to anywhere in New Zealand and the engagement would include travel costs

There was some initial education explaining what we/he/his team would do through the search and due diligence, and to make sure he had the right people there to support him. However, most of the learning was done while looking at actual properties, leases, numbers, and conducting due diligence.

The Process

Peter looked at many properties and some he was able to discard straight away. Others we reviewed in more depth, including reviewing the building, the tenants, the NBS details, insurance, LIM, the lease and other areas.

From there we made some recommendations for the client’s own team to follow up – so legal, accounting, valuations etc). The key realization for a buyer is every deal is different, and depending on what information is available, the due diligence required on our part is different too.

Part of my onboarding process is to help the buyer work out what is important and where their trade-offs were, so we could move confidently later.

The Properties

We analysed a lot of properties and were unsuccessful with two tenders before our successful purchases. We missed out on some otherwise great properties because Peter had discussed with the client what was fair value, so the client could confidently stick to their guns on price. This built up the trust we needed to eventually land the properties that we did.

The client had started the search looking for one property, however we eventually secured two deals that worked well in combination.

Property #1 was a national tenant and a near-new building rated at 100% NBS in Hastings. There was some concern that the tenant might vacate in future as their business may outgrow the property so a lot of our DD was in evaluating the risk in securing another tenant, which was low as it is an excellent property in a high-demand area with virtually no vacancies. We originally were the highest offer but the vendor wanted slightly more and kept the property on the market. We kept in touch with the agent and when the vendors softened we also moved quickly, increased our offer up slightly and were successful.

Property #2 is an older building in Palmerston North with a lower NBS %. The tenant had invested extensively in the fitout for their business and is happy with the location. The low NBS means it was harder for non-cash buyers to fund and that plus the lease meant the yield on offer was higher and we secured this deal at a 7% net yield.

During our due diligence on the lease, we identified an issue and included a variation to lease agreement being done by the vendor as a condition of sale. Happy buyer, happy seller.  

The Result

The client secured two great buildings as part of a portfolio. One is a great building with some tenant risk and the other a great tenant with some building risk. The very happy client has plans in place to improve the properties and is now free to focus on their future projects and opportunities.

  • Total property spend $4,500,000 (excluding acquisition costs)
  • Net lease with annual rent roll of $276,000
  • Net return 6.13%, with tenant paying most expenses this compares very favorably with residential
  • A financially viable pathway to increase the NBS in the second property
  • Built in rent increases
  • Interest deductibility not a factor

I had a goal of purchasing 1 or 2 commercial properties as a long-term investment. Commercial property was an area I was very interested in, but I run a business and lack the time to gain expertise, and to make the ‘next step’ of putting an offer on. A big concern I had was that being time poor, I would make a rushed and poor decision, bid too little, or bid too much.

iFindProperty were fantastic. I was able to outsource the ‘leg work’, while at the same time getting expert guidance over the entire process. I made a number of new contacts and developed a level of understanding I could never have gained from reading books and attending courses.

Working one on one with Peter Ambrose was a real opportunity and also very enjoyable. It took around 6 months to finalise a deal, but I am comfortable my goals are reached. The financial investment in iFindProperty's buyers agency service was logistically and financially well worthwhile.

Simon

Work with iFindProperty to Source a Commercial Property

Commerical property buyers agency is now available to a limited number of clients. Like our residential service, we prefer to work with just a few clients at one time in order to focus on you and make sure we get a result in the target timeframe. 

Commercial could be a very good option for investors who have built up capital in other areas, perhaps residential property, and now want to turn that into a much higher income.

The process to engage with us in this capacity is:

  • Book a call with Peter and discuss what you are looking to do, your budget and the criteria you have identified. 
  • If we are the right fit for you, discuss with your accountant, lawyer and broker to make sure your team is ready. We can introduce professionals to work with you as needed.
  • We prepare a buyers agency agreement and complete ID checks.
  • You will learn about commercial investing through working with us, both during the onboarding process and during the search and due diligence
  • Once all signed we start searching for, and introducing properties.

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Nick Gentle
Business Owner & Operations Manager
nick@ifindproperty.co.nz
027 358 3855

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