This week Chris and I did a flying visit to our shop and uppers development to check on progress as our allocation of works are just about complete (our tenant will finish his bespoke fit out independently). The lease commences this Monday so we wanted to hand over a celebratory bottle of champagne to our tenant (which is what you can see in the headline picture).
I thought this would be a good opportunity to create a mini update on our shop and uppers development, with the focus being on minimising risk and the importance of treating your tenant like a quasi – business partner.
When we first picked up the keys to our shop I shared a post with some explanation of our investment approach and a few walkround videos showing the state of the building. It’s fascinating to view those now compared to the recent pictures. (I’ve included a link to that original post at the bottom so anyone interested can see the before and after).
As I shared back in that initial post, our approach to investing is always to de-risk as much as possible so we can buy with confidence. To achieve that, we look to bake in as much certainty as possible by lining up our desired end outcome where we can, and ensuring we have multiple exits to the deal. We initially found this building while looking to meet some requirements for a particular brand. Even though they decided to withdraw interest, we proceeded with the purchase for the following reasons:
-there was already expressed interest from two local independent businesses in renting the premises, and potentially with an option to buy
-research with local letting agents gave us confidence in the strength of demand for letting one and two bedroom flats in this location (ie the primary exit for the uppers)
-the commercial unit could be divided into two or even 3 separate units if required, presenting more options and different appeal to a wider array of tenants. The rear section has access to a car park and would make a great wee workshop for which we have been informed by a commercial agent there is high demand and low supply.
-with a purchase price of under £100K and the fact we have multiple exits, the risk was minimised
By pulling the thread and exploring the interest from one of the local independents, we have been able to establish and nurture a working relationship that has resulted in a fantastic lease and a win win outcome for their business and ours.
QUASI BUSINESS PARTNERS
By taking the time to understand our client ie viewing their existing premises to understand the current inefficiencies and their ideal desires, we were able to take our 2400 (approx) SQFT of open retail space and strategically reconfigure it to serve the business operations and future vision for a well established local bakery business.
-Front: retail counters for freshly baked goods and a cafe
-Middle 1: finishing area
-Middle 2: baking area,
-Rear: dispatch area and chiller
One of the visions we were excited to help make a reality was to allow customers of the shop and cafe to see through to the middle section where the expert bakers would be finishing off the sweet treats ready for consumption.
Here’s a video explaining how the entrance to the flats will be created:
And this next video walks round the reconfigured space inside:
THINGS WE’VE DONE/LEARNED THAT HELP MINIMISE RISK
-put a long lease in place
-gaining an understanding of our client’s business to feel comfortable they will be around for the long term
-understanding the flexibility of the commercial space
-the tenant personally investing heavily into the premises (that kind of commitment means its in their interest to stay in the building because of the investment they’ve made for the business).
-Establishing a good working relationship early on
Due the extent of investment from our tenant to fit out the premises, along with the more challenging trading conditions, he had asked for concessions relating to the deposit bond and schedule of condition costs. Rather than reducing the deposit, we have allowed a 4 month runway to build it up in stages. Similarly we have also agreed to pay for the schedule of condition but on the basis our tenant will pay us back the full cost over 6 months.
WHAT’S NEXT?
Naturally it will be building out the residential element as soon as possible. Our commercial tenant has also now expressed interest in renting one of our upper flats once completed so that may well mean an immediate tenancy once the build works are finished.
We are also actively searching for our next commercial investment.
Whilst the decline in some areas of retail has been massively accelerated by coronavirus, commodity type retailers in secondary and tertiary towns have fared well. With the rise in working from home these out of town areas are looking to be increasingly attractive, particularly when the income can be diversified from a mixed use building.
What are your sentiments on commercial investments going into 2021?