Existing commercial showroom property purchase & re-lease

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As outlined in Tenants are God No 1, that project started with finding an undervalued commercial property, however, like Tenants are God No. 2, it again started with the tenant. I was a commercial property consultant in 1998 and actively avoiding owning commercial property. The logic was that I didn’t want to be in a position of conflict with my clients, however, it was also because commercial required more equity than residential (between 60-70% instead of residential that at that stage was 85%) before mortgage insurance was needed.

The funny thing here was that we purchased this property from a client of our consultancy business, on full disclosure of course, as they wanted the holdings sold as they needed a capital return for a quick sale. My best friend ran a large bedding retailer in the same region, but outside of this catchment. As such, I pitched to him a new store location, which is something we typically did for many businesses, helping them to roll out within our region; National brand names like Supercheap Auto, Subway, Dominos, 7 Eleven, Night Owl, Jetts Fitness, Sam’s Warehouse and Forty Winks, plus many others. This 510m2 retail showroom was an ideal size and in the first stage of a complex that already included Blockbuster Video (a big deal back then), McDonald’s, Mitre 10 and homemaker tenants soon to be joined by a number of the national names mentioned above in stage two.  

We purchased the showroom for just over $500,000 where a market rent was approx. $200psm net for the space, and so $102,000 per annum net was agreed. At the time, valuations were assessed on a capitalisation rate of 8% and so the property was valued at just over a $1,000,000 on settlement. Yup, a lease – or more to the point – a sustainable income stream, increased the value by almost $500,000 in an instant, meaning a 50% return on purchase price. 
Furthermore, the bank advanced the full amount of the purchase to allow the purchase price including stamp duty to be fully paid from the new loan, as it was less that the 60% loan to value ratio of the valuation they were prepared to extend against.