Advice On Purchasing Pad In Shopping Center

[normando]

I'm interested in buying a commercial property on an out parcel pad in a small shopping center. I've bought residential and small retails previously but never in a shopping center with common expenses paid by professional management. Are there any pitfalls I should know about buying such properties (higher insurance liability? etc.).

 

[Michael S]

If there is a large anchor tenant (especially a grocery store) find out if they're exempt from some or all of the common area maintenance (CAM) charges. If the actual expenses are say $3.00/SF based on the total leasable area of the shopping center (say 100,000 square feet) and the 50,000 square foot grocery store negotiates a lease saying they don't have to pay any CAM, you could end up paying the equivalent of $6.00/SF unless the landlord is willing to eat the portion the grocery store should have been paying.

If there's a NNN lease in place though you should be ok as the tenant will be responsible for those expenses.

Also, I would take a look at any cross-access easements which guarantee access to the pad site from the surrounding parking lot/drive aisles of the larger shopping center. That particular pad may not have direct access to a public right-of-way and without a cross-access easement in place the owner of the surrounding parcel could basically cut off vehicle access. Also, that agreement should spell out how maintenance costs are split as you could be receiving the benefit of the surrounding site and would therefore be expected to pay for some of that upkeep (new paving, etc.)

 

[NachoPerito]

If the anchor goes dark...

 

[normando]

If there is a large anchor tenant (especially a grocery store) find out if they're exempt from some or all of the common area maintenance (CAM) charges. If the actual expenses are say $3.00/SF based on the total leasable area of the shopping center (say 100,000 square feet) and the 50,000 square foot grocery store negotiates a lease saying they don't have to pay any CAM, you could end up paying the equivalent of $6.00/SF unless the landlord is willing to eat the portion the grocery store should have been paying.

If there's a NNN lease in place though you should be ok as the tenant will be responsible for those expenses.

Also, I would take a look at any cross-access easements which guarantee access to the pad site from the surrounding parking lot/drive aisles of the larger shopping center. That particular pad may not have direct access to a public right-of-way and without a cross-access easement in place the owner of the surrounding parcel could basically cut off vehicle access. Also, that agreement should spell out how maintenance costs are split as you could be receiving the benefit of the surrounding site and would therefore be expected to pay for some of that upkeep (new paving, etc.)

I assume CAM would be equally prorated based on property size. I'll look further into the CAM agreement. Also, thanks for reminding me of easement issues. They can be a problem. I also notice that sellers willing to pay for difference in next increase rent payments when they calculate cap rates. Do I consider current cap rate in determining sales price or assume increased rent included for now.

 

[Michael S]

I assume CAM would be equally prorated based on property size. I'll look further into the CAM agreement. Also, thanks for reminding me of easement issues. They can be a problem. I also notice that sellers willing to pay for difference in next increase rent payments when they calculate cap rates. Do I consider current cap rate in determining sales price or assume increased rent included for now.

In theory a capitalization rate represents the year one income, so the 12 months following the sale. In realty it's rarely that concrete. All things being equal it's in your favor to cap the existing income, and it's in the seller's favor to cap the proforma income - including any scheduled increases over the next 12 months. Here's an example.

$50,000 NOI currently at a 7% cap rate = $714,285.71

Assume a 3% increase after 3 months and the NOI increases to $51,125. At the same cap rate the price increases to $730,357.14

You would be paying $16,071.43 more to get an extra $1,125 that first year. Doesn't sound like a very good deal. In order to keep the purchase price the same the cap rate would need to increase to 7.16%.

The cap rate should reflect any rent increases. If you can buy one property with a flat lease for 10 years and another with 3% annual escalations, all things being equal you would pay more for the second property, which would translate into a lower cap rate.

 

[techbiker]

Look out for restrictive covenants.

We nearly closed on a pad site in a shopping center until we read the 250 pages of restrictive covenants and easements:

1. Restrictions on parking lot lighting.
2. Only a narrow list of permitted tenants
3. Construction freezes around holidays.
4. Pre-set building areas
5. Parking restrictions
6. Requirements to use specific concrete in construction and to repair any damaged surfaces quickly.
7. Restrictions on vehicle travel at certain times of the day.
8. etc....

Any amendment to the agreements required unanimous approval, making changes very difficult. In our case, the lot was virtually undevelopable. Although your lot is already built, similar restrictions can still bite. Memorize the reciprocal easement agreement(s)!

Worse still are so-called "business parks" or "commercial owner's associations" that mandate dues (often to the original developer).

 

[normando]

Look out for restrictive covenants.

We nearly closed on a pad site in a shopping center until we read the 250 pages of restrictive covenants and easements:

1. Restrictions on parking lot lighting.
2. Only a narrow list of permitted tenants
3. Construction freezes around holidays.
4. Pre-set building areas
5. Parking restrictions
6. Requirements to use specific concrete in construction and to repair any damaged surfaces quickly.
7. Restrictions on vehicle travel at certain times of the day.
8. etc....

Any amendment to the agreements required unanimous approval, making changes very difficult. In our case, the lot was virtually undevelopable. Although your lot is already built, similar restrictions can still bite. Memorize the reciprocal easement agreement(s)!

Worse still are so-called "business parks" or "commercial owner's associations" that mandate dues (often to the original developer).

The agent makes it simple that NNN tenant will take care of these costs. I'm worry if vacant, I have to deal with it. Are 250 pages of convenants typical? Even leases are not that many pages. Need to hire an attorney to review. Too costly.

 

[techbiker]

The agent makes it simple that NNN tenant will take care of these costs. I'm worry if vacant, I have to deal with it. Are 250 pages of convenants typical? Even leases are not that many pages. Need to hire an attorney to review. Too costly.

Yes it was costly- around $4500 in our case for an attorney just to reveal that the lot was undevelopable. In our case, the seller's agent kept insisting that the restrictions did not exist...

Have you performed a title search on the lot yet? Often you can purchase a simple one for around $100 out of contract. Then just read what comes up- I've seen many reciprocal easement agreements that are 100+ pages long. The agreements usually list restrictions fairly clearly.

I would be primarily concerned with any real or perceived loss of value related to the restrictions. Some shopping centers were not created to be legally flexible enough to adapt to changing times. Mind you, this is just from my experience in the DFW area.

 

[normando]

Yes it was costly- around $4500 in our case for an attorney just to reveal that the lot was undevelopable. In our case, the seller's agent kept insisting that the restrictions did not exist...

Have you performed a title search on the lot yet? Often you can purchase a simple one for around $100 out of contract. Then just read what comes up- I've seen many reciprocal easement agreements that are 100+ pages long. The agreements usually list restrictions fairly clearly.

I would be primarily concerned with any real or perceived loss of value related to the restrictions. Some shopping centers were not created to be legally flexible enough to adapt to changing times. Mind you, this is just from my experience in the DFW area.

I have a mortgage broker I know and when I really need to see a Prelim, she would contact her title company for help. Whenever I look at a property, I look for easements especially on parking lots having had a bad experience before on an adverse prescriptive easement. I feel you. I spend so much time looking at one property and within inspection period, I found out site use to be a gasoline station. I make a policy never buy gas sites or dry cleaning sites.

 

[Michigan CG]

If you are asking these types of questions and this many questions you should probably buy something else you are more familiar with.