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Top Adding - Strategy for Shopping Center Investments in California
Investing in shopping centers in California presents a real challenge for many investors. Most shopping centers in the state offer very low if not the lowest cap rate in the nation, e.g. 4-6% range. As a result, the cash flow is weak compare to shopping centers in other states. Investors will also need more money for a down payment, e.g. 40-70% of the purchase price to qualify for a loan. The upside is that the vacancy rate for retail properties in the state is among
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
the lowest in all 50 states. For example, the retail vacancy rate in San Jose is only about 4%, the second lowest in all major metro areas (Oakland has the lowest vacancy). This means the income stream should be very stable. So, as an investor, if you don’t achieve strong cash flow, you must look for property with strong potential for appreciation to achieve better investment returns. To accomplish this, you could:
1. Sell the property at a lower cap rate. If you
1. Sell the property at a lower cap rate. If you
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
purchased a shopping center at a higher cap rate 5-10 years ago then you will be able to capture strong appreciation. However, if you purchased the property recently at a low cap rate already, it’s not possible to reduce the cap rate much lower. So this approach probably won’t work.
2. Increase the rental income. Most NNN leases have a fixed 3% annual rent increase. Assuming the market cap rate remains the same, this will only equate into an unimpressive 3% annual
2. Increase the rental income. Most NNN leases have a fixed 3% annual rent increase. Assuming the market cap rate remains the same, this will only equate into an unimpressive 3% annual
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
appreciation, unless you want to achieve appreciation in different ways.
Property Analysis The goal to increase the rental income begins with the analysis of your purchase. While most retail properties in California offer 4-6% cap rate, many properties charge tenants below market rent due to
1. Poor property management and/or simply ignorance about market rent. Some property owners choose to manage their own properties to save expenses. However, they are among the
Property Analysis The goal to increase the rental income begins with the analysis of your purchase. While most retail properties in California offer 4-6% cap rate, many properties charge tenants below market rent due to
1. Poor property management and/or simply ignorance about market rent. Some property owners choose to manage their own properties to save expenses. However, they are among the
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
worst property manager if the collected rent is used to measure their performance. They often are not aware of the market rent and so they often lease to the first tenant to ensure the unit is occupied quickly.
2. Long term leases signed when the rent was low.
So the key is to identify properties with below market rents and a low price per square foot. These properties will provide you with upside potentials. However, the market rents often have a wide range. For
2. Long term leases signed when the rent was low.
So the key is to identify properties with below market rents and a low price per square foot. These properties will provide you with upside potentials. However, the market rents often have a wide range. For
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
example retail space in San Jose commands between $2-5/SF a month. It’s not easy to determine if the tenants of the property pay below market rent. The following are some properties that have low upside potential that we may want to screen out:
1. Big-box properties with anchor tenants, e.g. Wal-Mart, Target, or Safeway. These big national tenants often sign long term lease with low rent due to its creditworthiness and large rental space. Once the lease is signed,
1. Big-box properties with anchor tenants, e.g. Wal-Mart, Target, or Safeway. These big national tenants often sign long term lease with low rent due to its creditworthiness and large rental space. Once the lease is signed,
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
the rent is locked in for 20-30 years. So it’s almost impossible to drastically increase the income within a short time. As a matter of fact, many big-box retail properties in California are listed at below replacement cost. This is because they have long term leases with below market rent. They are on the market for a long time and yet is not sold because the cap is low, e.g. 4%. The prospect for higher income is sometimes 15-20 years away when the lease expires.
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
2. Retail centers with very high price per square foot, e.g. more than $800/SF. You will need to charge the tenant $4/SF a month plus NNN to achieve 6% cap. This is almost the highest rent in the market so it’s hard to push it up even higher.
3. Retail centers with long term options AND fixed 3-5% rent increase instead of being adjusted to market rent. You should pay attention to this little detail in the lease as it may have major impact on the rent you collected.
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
The problem is the appreciation is often higher than 3-5% annually in California. So if rent is not adjusted to the new fair market rent at the beginning of a new lease option, the rent is most likely below market rent and it may not sell at the highest market price.
On the other hand, if you see multi-tenant shopping centers offered at 4-5% cap but priced at only $200-300/SF it’s very likely the property has below market rent. This kind of property will offer strong
On the other hand, if you see multi-tenant shopping centers offered at 4-5% cap but priced at only $200-300/SF it’s very likely the property has below market rent. This kind of property will offer strong
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
potential for appreciation. Once you see this property, you should also see if the property is:
1. Adjacent to an anchored tenant. Business owners prefer to be near an anchored tenant as this anchored tenant will bring in more traffic to the center. The business owners are willing to pay higher rent for this location.
2. A multi-tenant strip with small units. In general the rent is higher for small units, e.g. 1000 SF than for larger 4-5000SF because there are more
1. Adjacent to an anchored tenant. Business owners prefer to be near an anchored tenant as this anchored tenant will bring in more traffic to the center. The business owners are willing to pay higher rent for this location.
2. A multi-tenant strip with small units. In general the rent is higher for small units, e.g. 1000 SF than for larger 4-5000SF because there are more
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
tenants looking for 1000 SF units.
3. On a major artery or near the freeway. More traffic and convenience are always good for business.
4. In a stable or growing area with higher household income. When the local residents have higher disposable income, they will spend more time and money for good and services offered in the retail centers.
5. Located in an area with low vacancy rate and high rents. Ideally, you want a property lease that will expire within 1-5 year
3. On a major artery or near the freeway. More traffic and convenience are always good for business.
4. In a stable or growing area with higher household income. When the local residents have higher disposable income, they will spend more time and money for good and services offered in the retail centers.
5. Located in an area with low vacancy rate and high rents. Ideally, you want a property lease that will expire within 1-5 year
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
s. This will allow you to adjust to the higher market rent quickly.
Sometimes it helps to see problems as opportunities. For example:
1. Most investors don’t like retail strip with gross leases. However, if you can convert these gross leases into NNN you will be able to get strong appreciation.
2. Most investors don’t like a shopping center with high vacancy. However, you may be able to buy at a low price. If you can turn around and improve the occupancy rate qu
Sometimes it helps to see problems as opportunities. For example:
1. Most investors don’t like retail strip with gross leases. However, if you can convert these gross leases into NNN you will be able to get strong appreciation.
2. Most investors don’t like a shopping center with high vacancy. However, you may be able to buy at a low price. If you can turn around and improve the occupancy rate qu
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
ickly, you will be able to realize good appreciation.
Property Management:
Once you purchase a property, you will need a good property manager to help increase the rent. The property manager is a key partner to implement your investment strategy. In order to increase the rent substantially, e.g. 30-50% more compared to the rent in the previous lease, the property manager must demonstrate to the tenants that the new market rent is a fair market rent. Otherwise, the
Property Management:
Once you purchase a property, you will need a good property manager to help increase the rent. The property manager is a key partner to implement your investment strategy. In order to increase the rent substantially, e.g. 30-50% more compared to the rent in the previous lease, the property manager must demonstrate to the tenants that the new market rent is a fair market rent. Otherwise, the
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
tenants may make a wrong decision and move out. This involves research to determine fair market rent and providing comparables to the tenants. So as a fair business person, you want to make sure the property manager has an incentive to do the extra work. One way to accomplish this is to compensate the property manager a certain percentage of the appreciation when the property is sold in addition to the typical 4-5% property management fees. This is a win-win for both
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
the property manager and landlord when the property appreciates in value due to higher net operating income. Otherwise with a typical 4% fee in a property management contract, you will likely receive a 3-5% rent increase when the lease is renewed. Both you and the property manager lose when this happens.
Of course, some tenants with marginal profits won’t be able to afford the higher rent and will move out. The property manager will have to evaluate the financial an
Of course, some tenants with marginal profits won’t be able to afford the higher rent and will move out. The property manager will have to evaluate the financial an
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
business strengths of all the tenants and identify potential move-out’s. She will plan accordingly to find replacement tenants to minimize income disruption.
Prior to a substantial rent increase, you may want to make cosmetic changes to the center to give it a new look. You may want to consider the following:
1. Re-paint the center.
2. Re-surface and paint the parking lot.
3. Ensure the air conditioners and heaters are in working condition.
4. Fix any leaks in t
Prior to a substantial rent increase, you may want to make cosmetic changes to the center to give it a new look. You may want to consider the following:
1. Re-paint the center.
2. Re-surface and paint the parking lot.
3. Ensure the air conditioners and heaters are in working condition.
4. Fix any leaks in t
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
he roof.
When the tenants see these improvements, they may convince themselves that it’s too risky to move the business to another lower rent location.
Favorable Financing:
You can also improve cash flow by obtaining financing with favorable terms from unconventional sources, e.g. insurance companies or conduit lenders instead of typical commercial lenders. While you have to pay higher loan fees and closing costs, the long term savings in interest payment are substa
When the tenants see these improvements, they may convince themselves that it’s too risky to move the business to another lower rent location.
Favorable Financing:
You can also improve cash flow by obtaining financing with favorable terms from unconventional sources, e.g. insurance companies or conduit lenders instead of typical commercial lenders. While you have to pay higher loan fees and closing costs, the long term savings in interest payment are substa
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
ntial. This should lower your interest rate from about 6.75% to 5.8% for multi-tenant shopping centers.
Conclusion:
The commercial real estate market in California is very different due to its very low cap rate. To achieve strong investment return, you will need to be a creative business person with this “so-called” passive investment. By choosing the right property with below market rent, hiring a highly-motivated property manager, and selecting low-interest finan
Conclusion:
The commercial real estate market in California is very different due to its very low cap rate. To achieve strong investment return, you will need to be a creative business person with this “so-called” passive investment. By choosing the right property with below market rent, hiring a highly-motivated property manager, and selecting low-interest finan
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
cing, you will achieve strong cash flow and robust appreciation within a relative short time.
Disclaimer: The investment strategy and investment management information presented in this article should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. The authors intend to provide information to the general public based on our recommendations of investment management and investment strategies and is no
Disclaimer: The investment strategy and investment management information presented in this article should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. The authors intend to provide information to the general public based on our recommendations of investment management and investment strategies and is no
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
t designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The authors makes no warranty or representation regarding the accuracy or legality of any information contained in this article, and assume no liability for the use of said information. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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