Location vs. Strength of Tenant: Questions Answered by Brian Fielding

Hello Mr. F;

We have become diligent readers of your blog and news releases and thank you for being such a valuable resource.

My partners recently formed an “investment group” that studies various ways in which we can invest for our future. Our friend Bob has taken the lead on commercial property investment and presented our group with an offering of a well-known electronics retailer’s store in a neighboring state. At first rather excited at the opportunity, we have been following the disturbing financial reporting associated with this retailer and wonder if you could give us some advice on whether this would be a safe investment.

Thank you,

Jeff G – San Diego, CA

 

Dear Jeff [and partners],

We steer clear of individual recommendations and admit to knowing little more about your electronics store retailer’s financial stability than has been readily available in a variety of financial journals including the Wall Street Journal. However, I am responding to your question because it begs commentary on establishing investment criteria.

While it is very tempting to base a purchasing decision solely upon the quality of the underlying lease and the financial strength of the tenant, the prudent investor looks well beyond the surface and uses careful judgment as to the underlying value of the building and its location. Everyone has heard the basic maxim of real estate, “location, location, location”, and it appears that this is all the more true for your considered investment. You need to ask yourself if the tenant were to close this store or get into economic distress, does this size building in this location demand a premium in the future and is the current rent so below market that you are well positioned to find a new tenant and enjoy even greater return [keep in mind that you will likely have to make some major renovations for a new retailer … so plan on budgeting for that event from day one]

While you would love to rely on the creditworthiness of your tenant for dependable returns, keep in mind that your site will likely remain open if you “read” on location is correct … perhaps being one of the few stores that the national retailer will want to modernize and keep operating as it works to right its corporate “ship”.

If you have the desire to know more about retailers and wish to understand how they choose size and location, think about joining the International Council of Shopping Centers who often have regional shows where major retailers and brokers who specialize in that sector will be present their new concepts and meet with brokers and property owners under a very tight time schedule. Count on feeling very much like an “outsider”, but if you attend a few retailer sessions and wait your time, you can meet market movers and shakers at these events [The annual convention is huge and is held in Las Vegas – plan to be a bit overwhelmed and do your best to set appointments with the retail brokerage firms that operate in your market – this is a very different business than you might first imagine.]

Happy and profitable investing ….

Brian


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Concerns About Older Buildings Answered by Brian Fielding

Dear Mr. F.

We are thinking of buying an older building on a great corner in our neighboring community. My partners worry that the property is “dated”  and not terribly attractive. Do you have any advice on this type of concern?

Bill and Mary G.

 

Dear Bill and Mary,

Congratulations on your new venture! We wish you all the success in the world.

Actually, I am pleased that you broached this topic. Few new investors are able to assess an investment property when it is [currently] unattractive. If you have been satisfied that the building is structurally sound and well positioned, you may only need to have an architect and/or interior designer help you determine if some paint and minimally invasive construction can turn your ugly duckling into an exciting “new offering”.

Wonderful examples of old industrial buildings converted into “Creative Space” abound in a number of communities [West Los Angeles first comes to mind, but there are examples in most any city] … investors recognizing the value of the bow truss structure allowing for open space soaring ceilings. While the highest end conversions have cost up to $100/ft., there are many more minor renovations that have led to incredible returns for the insightful investor. Similarly, we have seen structures come to life with nothing more than a stroke of bold colors and perhaps some inviting awnings.

If you have the eye and understand the costs … all the better. However, if there is any question, many professionals will be happy to make creative suggestions, hoping that your acquisition of the asset will lead to new future business for their firms.

Brian Fielding


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