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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