Commercial Property - newbie question

Hi everyone,

After riding through the residential wave over the last couple of years, I am deciding on venture out on a CIP this year.

I made an offer for a retail shop in Ashfield (off-market) for $500k , 100sqm. It's not close to the main strip or the station but it's closer to the school side and further east. It's still ok.

The rental yield will be around 6%. but I am likely going to use for myself as a retail shop.

As a newbie I have the following questions

1) The historic price for a retail shop around this block is only $3600/sqm (using historic sales back in 2014) but I have made an offer close to $5000/sqm!

Am I paying too much?? but I cannot find anywhere else where a retail shop of 100sqm is < $500k in sydney metro areas.

I have made the offer and the vendor has accepted though no money or document has been signed. I said it was subject to due diligence and finance approval as well.

I know I can revert my offer on the bases of DD but I am still keen on the property but I don't want to make myself look insincere by changing my offer

2) Finance: My broker came back for this property the loan is maxed at 65% LVR, at 5.65% with 0.6% establishment fee + $1500 valuation fee. Does this sound right?

5.65% seems quite high to me or is it just the norm for CIP?

Any advice would help, as I am so not sure whether I am doing the right things.

Thank you!
DB

 

Direct comparison is not the methodology of choice for a CIP, you need to look at the capitalisation of income method.

Retail space in Ashfield (Liverpool Rd) runs over $500-650/m2

So 100m2 would lease for a minimum of $50k+gst

On a weak yield of 8% would be around $625k

You'd be laughing if you can pick it up that cheaply.

 

Thanks Scott.

Yeah its not directly on liverpool road but on a side street. Foot traffic is quite different (ie less people )

Its closer to the public school.

I m planning to open my own music school for kids so it suits well for this purpose.

Yeah thats what I thought $500k is very affortable but again its in a less busy st than liverpool rd.

Note: the 100sqm includes 30 sqm of parking n storage so actual usable floor space is only 70sqm.

 

chat to your accountant and solicitor about structure too.

The entity you own the business in should not be the same entity that owns the building. business should lease on same terms as if you rented from a stranger

 

That is what most people pay, but the commercial space has become a lot more competitive lately. If it's multi-use retail there are lenders who will do 4.39%, over 15 years, 70% LVR with $800 upfront (including valuation). Or if servicing is an issue 5.29%, over 25 years, 75% LVR with $1500 upfront + valuation fee (~$1250).

 

Thanks RPI, I was just on the call with my accountant as well so that was good timing.

He spoke about using a trust entity to purchase the property and then lease it to me (either thru my company or individually).

It's a good point that you mentioned that a proper lease needs to be in place because I was just thinking of doing a back of envelop scribble as the 'lease doc'

 

Thanks @Simon Moore this is really helpful. I haven't been advised of the loan term so maybe 5.65% isn't too bad.. I am not sure. I have been asked to do a val for $1500.

If say my finance doesn't go thru with this lender can I reuse this valuation report for another bank?

 

99% that loan term will be 15 years - Big 4 banks generally only do 15 years. Depending on when settlement is you could look at going through another lender or you might be stuck with the lender this broker has put you through. Commercial deals are slower than residential, really want a month and a half (preferably two) from application to settlement.

Unlikely, only if the valuer is also on the other banks panel of approved valuers. If you have been approved by a Big 4 with no issues, your would most likely meet the requirements for the 4.39% offer IF the property is multi-use.

 

Unfortunaly no inter-party leases for lease doc products

 

Does multi-use mean a mixed use premise (eg resi+retail) type of property?

 

That's mixed use. Multi-use is bakery/restaurant/take away

 

I'd suggest it very prudent to look at any finance option in commercial from a more holistic view. There is wide variety in terms or rate - but also terms and feature. Is a 25 year term more important, or shorter? Interest only? does the bank have review rights which can come back to sting you in a few years time? Balance these points to get a commercial lend which fits your overall goals, not just cheap.