Calfornia Real Estate License #00678352
Located at 1728 Union Street, Suite 311, San Francisco CA 94123 Phone (415) 441 4499
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Set. Stress Test Acquisition Criteria --
Or, Navigating Successfully in a Real Estate Hurricane
Why Disciplined Use of Criteria Required
Unless we have a clear Prime criteria, there's little chance that a true opportunity can be seized. We risk the danger of missing the market by waiting for a vague, better deal. It's not enough for seasoned investors to target "deeply discounted properties," or to "steal the deal". Setting criteria defines a steal, or deeply discounted property. But it varies from investor to investor. It's relative.
Core Values
First a word about the core value:. The longitude and latitude -- or, location -- is critical in a down market. The "dirt value" carries more weight than the building or the tenants when tenants are learning haircutting arts. Vehicle traffic in the case of retail properties will react less and so it's core value.
Prime Criteria
There are dozens of benchmarks we use when we do our proprietary analysis. Here I'm talking about the PRIME criteria. We must keep it simple. You'll see in our example below.
Example
So, what's involved here is to have a clear set of criteria for acquisitions and stress testing those criteria points. Cap rates are useless alone. There a multitude of offerings out there above 9 capitalization rate. That's a good cap, yes. But high cap rates are often found with high cost per square foot, which may be over $250 or almost twice the replacement cost (San Francisco Bay Area Mean Book estimate). So we must match cost per square foot -- say $80.00 with a nine cap rate. Now we're beginning to define value.
Stress Testing Our Criteria
And we must stress Test our criteria for worse case and best case scenarios.
Rent rolls are deceiving. Market rents aren't necessary market rents. A retail center may be getting an actual average $1.75 per sq/foot nnn. But a conservative market rent/foot is no more than $1.00 in this market/ .50 for large tenants (not nationals). The Income Statement must be recalibrating. Thus the Net Operating Income is adjusted, so is the price point. So even using the same cap rate, now the price and its components have been stress tested, and our offering purchase price adjusted accordingly.
For more or to discuss, please contact us at (415) 441-4499
(or toll free, at 800-886-0155)
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