We are often asked by investors and others why we do not buy more properties. How we regard risk is fundamental to the answer. When reviewing potential acquisitions, there are several variables we consider in assessing the risk/reward balance. Here are some of the most important:
- Location: Will this location get better, worse, or stay the same? We make an educated guess based on trends, neighboring alternatives, construction costs, demographics, and other factors.
- Tenant Roster: Are the current tenants impacted by internet sales? Do they have a history of financial stability? Where are their competitors?
- Rents and Lease Expirations: Are the rental rates paid by each tenant likely to go up, down, or stay the same? Are there many near term expirations and is that lease rollover an opportunity or a negative?
- Real Estate Taxes: How is the property assessed today and how might it change based on our purchase price and/or changes in the net operating income?
- Vacancies: What is the vacancy rate in the immediate area? How long have the vacancies in the subject property been unoccupied and why? Have they been vacant because the location is undesirable, because there are too many “category killers” in the center/area, or is it a reflection of current ownership not deploying the necessary funds for buildouts and commissions?
- Capital Improvements: How old and in what condition are the roof, HVAC units, parking lot, etc.? Does the property need a facelift? In what condition are the vacant units? How much will it cost to get them presentable and finish them for occupants?
- Interest Rates: As Jonathan Basofin noted in another article in this newsletter, Cloverleaf emphasizes interest rates less than many others, but trying to assess rate trends is always a consideration. Will we have an opportunity to refinance based on leasing success and/or projected interest rates? How will rates affect cash flow and, ultimately, sale?
No one ever accused the Basofins of being overly aggressive about risks. That mentality has a lot to do with why we have been in business for over 40 years and why the company is the size that it is. In evaluating risk, we take comfort in some basic personal and business values. Maybe that is why Cloverleaf is generational: shared values, shared risk/reward assessments, and not trying to be the biggest or best-known player in the real estate world.