Real Life Case Study: What is the value of this 4 Tenant Retail property in Long Island?

Julian.Bostone's picture
Rank: Chimp | 13

I have an associate who co-owns (50% undivided interest) a 4 tenant, Class B Retail property in a middle (to working) class Long Island residential area which generates $16,000 a month total NOI with NNN leases.

The leases all have 5-10 years left to run with a good probability of renewal across the board. No inordinate cap ex or tax issues are anticipated.

The area is surrounded by multifamily buildings and has decent fundamentals for retail.

The tenants are a: dry cleaner, sandwich shop, grocery store and a generic ice cream parlor.

He owns the property with his brother who also manages the property for 8% of gross rents since my associate lives in California and is not a real estate guy. Friend's piece of the NOI is $8,000. He is retired living with his non-working wife in Newport Beach and lives fully on the monthly $8,000 of NOI.

There is no debt to service because they paid that off +/- 20 years ago so I am told.

In any event, the brothers have had a falling out, and now the managing brother wants to buy my friend out.

Given the above, how would you value my friend's retail piece?

Note/subjective factors: He values cash flow over principal (ie if he sells, he would need a competing investment to kick off $8,000 each month / $96,000 annually to support himself, and his wife. He doesn't have any kids).

The attached photo: is not of the actual property, but representative of the quality. The actual site has 10-15 parking spaces on the property lot.

United States - West
United States - Northeast

Comments (11)

Sep 8, 2013

Back-of-the-envelope, divide by a cap rate to get a multiple. Not a CRE expert, but fair value is probably somewhere in the 6-8% range today. See p.19-20 of this PDF for some indicative figures for different markets. So an interest that throws off $96k/year would be worth $1.2-1.6m. More if there's significant potential to increase NOI through improvements or rent increases, less if rents are likely to stagnate or decline for some reason.

Sounds like an ideal outcome for your friend would be a like-kind exchange (which would avoid a taxable event) into another retail property that his brother could sell him. It should be doable to find another property in the area that would throw off similar NOI.

Sep 8, 2013

Not knowing anything about the specific market you're in, I'd guess the cap rate should be more like 7.5 to 9ish. It's a small building, not highly multi-tenanted, presumably no credit in the leases, and most of all there's a dry cleaner. Do they do on site dry cleaning or is it just a drop off? Dry cleaners pretty much always have REC's and open up a whole other can of worms when it comes time to sell, finance, etc.

Are the rents at market? Over? Under?

Sep 8, 2013

I checked with friend and the dry cleaner is actually a self-service laundry. The rents are all market.

Sep 9, 2013

9ish seems high for a middle class area with decent vacancy rates (if it does).

Think it would be closer to the 7.5 side.. I'll go with 8-8.25

Either way, it should be a decent discount to comparables since it's a quick deal and doesn't involve DD/brokers/etc.

Sep 9, 2013

Really matters where on Long Island. Nassau or Suffolk county? You could be looking at much lower cap rates between nassau and suffolk. Also most real estate on the Island goes for a gross rent multiple. One of my investors is one of the largest strip mall owners on the Island, if you want, pm me with details.

Sep 10, 2013

While everyone here is citing cap rates could be low. The problem here is the credit quality of the tenants as well. It will come down to credit quality and comp sales in the market. I say 8%-9% is actually a given. I saw a small retail center with three strong tenants with national recognition and the property sold for 7.5% cap. The building was new as well and located in a reasonable intersection in Long Island. No way this property goes for below a 8% cap.

Sep 10, 2013

^^ Agreed

Sep 12, 2013

Sounds reasonable to me.

Sep 17, 2013

I would think this trades closer to 9%, given the class of the building, safely padded lease-up scenario, and more.

Sep 17, 2013

The tenant mix is not strong, the building is a Class B, and the market is subprime. There is a good chance the dry cleaners have caused environmental issues, but right now there is no way to tell unless your friend & his brother hire a 3rd party to conduct a Phase 1 Environmental Study. No way would this trade anywhere close to a 7 cap. I believe a 9-10% Cap rate would be more appropriate (possibly even a little higher). Back of the envelope, I would say the building is worth anywhere from $1.9m - $2.2m. Obviously this is a rough estimate, if there are serious environmental issues the building could be worth even less.

Sep 17, 2013