How to Underwrite, Select, and Lease Commercial Real Estate | Tanh | Part 2

This episode isn't about getting started in commercial real estate. It's about understanding the mechanics before you make a decision that residential experience didn't prepare you for.

In Part 2 of this conversation, Tanh walks through the actual operating logic behind commercial property valuation, site selection, tenant vetting, and lease structure - the decisions that determine whether a deal holds up under pressure.

This was not a creative problem. It was a systems problem.

We cover:

• Why NOI divided by cap rate is the only reliable valuation framework - and how to find market comps on LoopNet and Crexi before engaging a single broker
• How to vet a commercial broker the same way you'd vet a tenant - and what their answers reveal about whether they actually know their market
• Why mixed-use properties are the most accessible commercial entry point for operators coming from multifamily, and how to value the commercial and residential components independently
• The four location filters Tanh uses before any retail underwriting: traffic volume, visibility, parking availability, and demographic fit
• What a personal guarantee actually protects - and when a corporate guarantee from a national tenant replaces it entirely
• The difference between gross leases, net leases, and absolute net leases - and how each structure shifts financial risk between landlord and tenant

If you're a founder, operator, or investor approaching a capital decision that's structurally different from anything you've underwritten before, this conversation will feel familiar.

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Transcript

How Commercial Property Value Is Actually Calculated

Tanh 0:00

The easiest way to look at what your market is trading in is put two commercial ambulances up there on Crexi and Loopnet go to your area, type in your zip code, number three, and then just look at everything else for a second. Everything's trading anywhere between 728. This is quick and dirty to do it. Same thing with people. Then you look at office, you look at industrial, and you can kind of see what those numbers look like. Just based on the data that you have. Look at retail, look at industrial, look at office. You'll have a general idea of what everything's trading for. Hundred retail properties out there, and everything's trading anywhere between seven to an A cap. You kind of know where you're at.

Reshma Vadlamudi 0:47

Got it. So your property value is NOI by cap rate. And uh the NOI, you have to take the gross revenue, take your expenses out of it.

Tanh 0:56

Yep.

Finding Cap Rates On Loopnet And Crexi

Reshma Vadlamudi 0:57

Okay. So for the cap rate, um, how do someone know the cap rate for that area? Better to approach brokers or uh they would know more? Like, how would they know even if they start to underwrite, would they be able to guess it from underwriting?

Tanh 1:14

Like, how would they the easiest way to look at what your market is trading at is you know, the the two commercial MLSs out there are Crexy and LukeNet. Go to your go to your area, type in your zip code or your city, your state, and just look at everything that's for sale. Now you can subcategorize it, look at retail, look at industrial, and look at office. And you'll have a general idea of what everything's trading for.

Reshma Vadlamudi 1:42

And you can just you can pretty much look at the actually list it there saying what it is for unless it's unpriced.

When To Use Brokers Vs. Doing It Yourself

Tanh 1:49

If the property's unpriced, you're gonna you're not gonna have an idea. But if they put on let's say all the retail, let's say there's a hundred retail properties out there and everything's trading anywhere between a seven to an A cap, you kind of know where you're at. You're around seven and a half, right? And that's this is a quick and dirty to do it. Same thing with LoopNet. Then you look at Office, then you look at industrial, and you can kind of see what those numbers look like just based on the data that you have, right? Now, CoStar is another software that you can use, co-owned by LoopNet. And they have a ton of data in there that you can look at, but it's it's a super, super pricey product. 500,000 bucks a month, it's crazy. So that's another way to find out what those valuations could go for in your area. But brokers, if you find the good ones, they should know what the cap rates are trading for in their area as well.

Reshma Vadlamudi 2:45

How do you find good brokers?

Tanh 2:46

You have to be able to vet them, right? You have to figure out what they're how long they've been in the business, what they actually trade. Do they are they specializing in industrial, office, retail? Is it the ass c asset class that you want? How do they trend how do they usually handle that transition or that trade? Are they very attention to detail? Do they know their area? Like, because if you're asking them questions, it's just like uh any any interview or any vetting of any sort. If you're vetting your tenants, if they're talking about some things that are far-fetched, you know this is not a good tenant, right? Or if they're late to the if they come late to the meeting, they're gonna be late on payments, right? So small things like that and figuring out if they truly know the market like they should. Okay. If you're asking them a question like, what do you think the vacancy rate is in the area? What's everything trading for? What's everything leasing for? How quickly does it take to lease up a space of this size? What would you do differently with this space? How do I get this to be more marketable and get a tenant in there quicker?

Reshma Vadlamudi 3:59

Yeah.

Tanh 4:00

The way they answer it will tell you whether or not they're a good broker. If they don't know their information, they're probably a shitty broker.

What To Figure Out Before Picking An Asset Class

Reshma Vadlamudi 4:08

What's some advice that you would give for someone that's wanting to get started in commercial real estate, but don't know what that first step should be?

Tanh 4:19

Why you want to invest in something. So i if you don't know why you're investing here, maybe it's just because you want more money. Figure out your why and figure out the best asset class to get you there. So if your why is I want to be a millionaire or I want a million dollars this year, or whatever that is, you you kind of have to get more a little bit more granular than that, right? If you have to your passion for the why has to be pretty strong as well. Because if you just want a million dollars, why do you want a million dollars?

Reshma Vadlamudi 4:53

Sure.

Tanh 4:53

Whatever your goals are, but at the end of the day, it it's probably going to be because it makes them happy. Yeah. So if you truly, if you can get granular with your why and really figure out why you want to do something, and if it truly makes you happy, that's the motivating factor that keeps you going.

Reshma Vadlamudi 5:12

Yes.

Tanh 5:12

In order to buy these properties. There's a million ways to make money.

Reshma Vadlamudi 5:17

Yes.

Why Education And Mentors Shorten The Learning Curve

The Mixed-Use Entry Point And How To Value Both Halves

Tanh 5:17

Businesses, stocks, trading, whatever. Is real estate really your your your best option here? If if if the answer is yes, then great. Now, to answer your question, once again, you have to figure out which of these asset classes really fits you and fits your mold. Do you want something that's more management intensive, or do you want something that's more passive? And what market are you in? You know, are you able to network with all the brokers in here, get in front of these buyers? Are you willing to put in the work to get these deals done? For anybody who doesn't know anything about non-residential commercial, I always say I think education, you have to have a foundation. You have to get your education in there. And a lot of it is very similar to multifamily. And there's a ton of books out there on multifamily. And I'll plug Joe Farrell's syndication book because that is probably the Bible when it comes to apartment investing. So that'll give you a good foundation for multifamily. But a lot of those pieces or or factors that go into looking at a multifamily property translates to commercial. You just have to bolt on a lot, a lot of different nuances in order to learn that. Once again, like net leases, right? Cam. Some of these terms you'll you'll have to build your foundation up to learn. Now, from there, I am a huge proponent of finding mentors. They shorten your learning curve, they've been through the trenches, and they should be able to teach you everything that they know. That's probably your quickest way to learn about commercial real estate. Now, depending upon the asset class that you that speaks to you the most, I think for the general population, the easiest way to get into commercial is looking at mixed-use properties. The reason why I say that is because you still have that multifamily component that every multifamily investor or real estate investor for that should be able to tackle relatively easily or easier. And then on now you just have the commercial side that you have to kind of figure out. So when you value it, look at it from two different ways. Look at it from the as built, like what would it take if this thing burned down today? How much would it cost me to rebuild this thing? There's there's a piece of your evaluation, right? That's what appraisers do too. The other piece is you look at it from the NOI and cap rate perspective. Do the same thing. Go to Crexie, go to LoopNet. What are things trading for on a cap rate perspective? Okay, now you have a good idea. Now, let's say in this mixed-use building, you have retail at the bottom. And it could be it could be a combination of whatever, but the most simple mixed-use building you're going to find is the retail component on the bottom with apartments up top. So you value the multifamily as any any person usually does with an NOI and a cap rate. Yeah now you now you know what that half of the of the building is valued at. You kind of do the same thing with the commercial side. How much can you lease it out for? Can you do net leases? Does that help you at all? Take that from an NOI perspective. Now you know what that's worth. So let's say you're buying a building for 250 grand, you know the apartments alone, let's say it's four units up top, you know the apartments alone are 250 grand, you just got a commercial space for free.

Reshma Vadlamudi 8:50

Yeah.

Tanh 8:50

Kind of nice. The and the reason why I say it's a lot simpler is because once again, it has that multifamily component into it, where if you're a traditional multifamily investor, it'll come easier to you.

Reshma Vadlamudi 9:01

Yeah.

Tanh 9:02

And you start slow with that, and then you build up to other asset classes.

How To Select A Neighborhood

Reshma Vadlamudi 9:06

How do you select the neighborhood? Like, is there a good place to invest? Like, are there any key factors that you would look for or uh that doesn't pay like or you don't pay any attention to it?

Tanh 9:20

I do. I do because uh in real estate, location is the only thing that you cannot change. Everything else is somewhat controllable. Location is the biggest factor, once again, because you can't relocate your property. If you if you buy the property, you're pretty much stuck with this property.

Reshma Vadlamudi 9:38

Yes.

B And C Class Areas: Where The Opportunity Lives

Tanh 9:39

So what I look for, and this depends on what type of investor you are and where you're comfortable with risk. But I I avoid A-class areas. A class areas, you're looking at properties that are already super expensive. They're probably class A built, brand new, and you're gonna pay a premium for that because it's lower risk. Now, B and C is where you c you could find some opportunity, but I'd rather find a C class property in a B class area than the other way around.

Reshma Vadlamudi 10:15

Yes.

Demographics, Household Income, And Tenant Sustainability

The Four Retail Filters: Traffic, Visibility, Parking, Demographics

Tanh 10:15

You don't want to buy the best building in a bad neighborhood, right? So I generally look at B and C class areas. I avoid D. You don't want a war zone. Yes. And the demographics have to be able to support whatever asset class you're looking at. If it's retail, if it's office, are there residential businesses around? Is it close to the residents? Can they travel within 10 minutes to get to this office building, or can they travel less than 10 minutes to get to this retail shop that they want? Household income is a factor. Do they have exposable income, expendable income, I should say, in order to keep these businesses afloat? What's the average house median value? Is it a better neighborhood where people are a little bit more affluent, or is it an area where there's a lot of you know renters and maybe HTV individuals? Because you know once you know the the income and whether or not the residents or the population of the area can support these businesses, it'll give you an idea of how long these tenants can stay there and be sustainable, right? So household value, income. I also look at vehicles per day. Are the streets busy? And this is this primarily goes for retail. Because if you put yourself in the shoes of a retail tenant, they want to be somewhere where people see them for their patrons to come in. Is it signalized traffic? Are they close to traffic lights? Because the more people stop, the more they're gonna look around. Yeah, are there any signage that tells you that you're there? So as a business owner, uh as a tenant, like having their business in a retail center, I want to know all these things because I have to know whether or not they're gonna purchase products from me. Yes, whether or not I'm gonna succeed. So I when you're looking at it from a commercial investor owner perspective, you also have to look at it from a tenant's perspective.

Reshma Vadlamudi 12:29

Yes.

Tanh 12:30

Does it benefit them? Yeah, can they survive? Can they make rent?

Reshma Vadlamudi 12:35

Yes.

Tanh 12:36

So some of the what are those four factors that I kind of just mentioned there? Parking. Yeah. Are tenants gonna or are patrons gonna be able to park to get to these places? Right? Visibility, parking, traffic, etc. Now, traffic, it's you kind of have to do you could do a traffic study, which is gonna cost you some money, or you can just sit on a bench and kind of watch what happens. Is traffic more involved in the morning or in the evening? Okay, or is it just kind of even throughout the day?

Reshma Vadlamudi 13:11

Okay.

Tanh 13:11

Because if it's in the morning, you know it's commuter traffic. You know, they're they're going to work.

Reshma Vadlamudi 13:15

Yes.

Tanh 13:16

At night, they're probably coming home.

Reshma Vadlamudi 13:17

Yes.

Tanh 13:18

If they're going this way, where's the highway? They're going this way to the highway, that's where they're going to work. If they're coming back, that means they're going home.

Reshma Vadlamudi 13:24

Right? Wow.

Tanh 13:26

So from there, you'll know the best type of patrons for this business. Coffee shop. If you know commuter traffic goes this way, they're probably gonna stop at the coffee shop before they jump on the highway.

Reshma Vadlamudi 13:40

Okay.

Tanh 13:40

Right?

How To Find And Approach Tenants For Vacant Space

Reshma Vadlamudi 13:40

Like whatever property you buy, then you think about your tenants and then you approach them just because you told me about the traffic study now, and you told how a coffee shop would work the best. So, how do you approach that? Like, do you go find your tenant?

Why Space Configuration Determines Which Tenants You Can Attract

Tanh 13:58

Let's look at retail. It depends on a lot of it has to do with the space. Okay. In multifamily, you know what you have. You got two bedrooms, you got a kitchen and a bathroom. Perfect. With retail or or even the other asset classes as well, you have to learn the configuration of the space. Is if it's how many times have people walked into a retail store that was super long and narrow, where you know it's probably eight feet wide, and you're gonna be very congested in the front. Yes. So it's gonna be hard for you to want to move down the line to check out everything else.

Reshma Vadlamudi 14:37

Yes.

Tanh 14:38

I don't want to be congested, you know. I want to be able to freely move within the store.

Reshma Vadlamudi 14:41

Yeah.

Tanh 14:42

So long and narrow is a challenge for spaces. You got a hundred feet to walk back, nobody's gonna do that. Uh-huh. So all your products are gonna be in the front, all your people are gonna be in the front mostly. So the configurations, is it wide enough? What can you put in here?

Reshma Vadlamudi 14:59

Okay.

Tanh 14:59

You gotta you gotta kind of put it in your your interior designer hat in order to figure some of these things. And I suck at interior designing. I'm I'm the worst when it comes to designing. So, in order to visualize what needs to go where, I'm not necessarily very good at that. I can I can picture it, but to start the cameras from the top, I'm not too great at that. But for when you have a retail space with a vacancy in there, you assess what type of tenants are already in here and what would be the best synchrony for another tenant.

Reshma Vadlamudi 15:36

Yeah.

Tanh 15:37

Obviously, you don't want two tenants that are butting each other. Like you don't want two of the same businesses in there.

Reshma Vadlamudi 15:42

Yes.

Tanh 15:43

Because now they're gonna be fighting for customers.

Reshma Vadlamudi 15:45

Yes.

Tanh 15:46

Nor do you want a doctor's office next to a bar.

Reshma Vadlamudi 15:49

Yes.

Tanh 15:49

Right? Yes. Let's say the doctor's office goes till 8 p.m. and people are getting rowdy next door until they start at six. So those two hours are essentially a watch for the for your doctor's office. That's not great.

Reshma Vadlamudi 16:02

Yeah.

Tenant Mix Strategy: What Fits, What Doesn't

Tanh 16:02

So ideally, you want to assess the type of tenants that you have and see what fits well. Maybe it's uh insurance, maybe it's a vape shop, maybe it's a daycare. Things that you don't have already that you can go out and fish for. Yeah. And obviously you can you can place an ad out there on Crexy, on LoopNet, and have people come to you. And a lot of times that works. But the other time, you gotta be proactive with it. Depends on how quickly you wanna get it stabilized.

Reshma Vadlamudi 16:34

Yes, yes.

Tanh 16:35

And um it it's a long process. It's not it's not overnight that you're gonna find a tenant, it's months.

Reshma Vadlamudi 16:40

Okay.

Tanh 16:41

So as long as you can identify what type of tenant can be in there, whether it be daycare, insurance, another bar, whatever, you kind of have to do your cold calling yourself. But once again, it's important that the configuration fits for that type of business.

Reshma Vadlamudi 16:59

Got it.

Tanh 17:00

And it and it has to be, it has to have all the necessary functions too. Does it have a bathroom?

Reshma Vadlamudi 17:05

Mm-hmm.

Tanh 17:06

Heating air, hopefully, and the uh electrical capacity.

Reshma Vadlamudi 17:11

Yes.

Tanh 17:12

Plumbing. If you want to put a dentist office in there, you're gonna need a shit ton of plumbing to to accompany all the chairs. Same thing with nail salons, right? So if you don't have that, you can't market to those people.

Reshma Vadlamudi 17:23

Got it. Got it. Wow. Okay. I never even thought about non-residential commercial from this perspective, actually. So lots of nuances. Yes, definitely. Yeah. And what is a traffic study and who does that?

Tanh 17:40

So there are companies out there that'll do traffic studies for you. Essentially, they will take a street wherever you want, and they'll put up some cameras that'll count cars for you. And it dep you could probably put it in front of the building in question, or you can do it somewhere else down the street or whatever. They'll essentially assess how many vehicles travel on this road per day.

Reshma Vadlamudi 18:06

Okay.

Tanh 18:07

And what type of traffic it is. Is it random traffic? Is it commuter traffic? Uh is it just random? I don't know. So they'll they'll classify that in some way, shape, or form for you. And they won't just do one day's worth, you know, they'll they'll probably do it over like a week to tell you what days have what.

Reshma Vadlamudi 18:28

Yes.

Tanh 18:29

Is it so you know, if throughout the week you get 20,000 cars, even on Saturday and Sundays, you know that's a pretty good road. Yes. Right. Versus let's say on the weekends it'll be five thousand dollars or five thousand cars per day versus during the week, you got thirty, forty thousand, right? So that that it it essentially just gives you more data to assess whether or not the tenants and this property could survive.

Reshma Vadlamudi 18:56

Red flags um for the location like in the neighborhoods, uh, that tell you like no, don't go here, don't invest here, or I think it comes down to the location itself.

Why The Lease Is The Investment

Tanh 19:08

To answer your question, as far as red flags go, if it if intuition tells me it's uh a bad area versus all the research that I've done, that's one potential red flag for the area. The area has to support the business. That's probably the number one thing. As far as properties go, there's a ton of other red flags. Conditions of it how old's the roof, parking lot, HVAC. Those are your three biggest capex items that's gonna cost a lot of money. If you don't underwrite for that, you could be in the red very quickly. So that and every property is the the strength of the property or the investment in and of itself relies on the lease. Yeah, it relies on how strong the tenants are and your responsibilities between the two, between the landlord and the tenant. So if I have a ton of responsibilities, let's say it's a gross lease, that would make it more of a risk to me because triple nets will trade at a lower cap rate, they're less risky. So if each tenant within this property or investment are not financially stable, that's a huge risk. You're buying a piece of paper that's not really worth anything. If they are, if there are strong national tenants, they've been here for a decade, and they're it seems like they are going to continue to do business, that makes me feel better about it.

Reshma Vadlamudi 20:52

Yeah.

Tanh 20:52

But as far as red flags go, it's how the leases are structured and location are probably my two biggest factors. Uh the I know I mentioned the CapEx items, but that's that comes from an analyzing underwriting perspective.

Personal Guarantees Explained

Reshma Vadlamudi 21:10

Yes. Okay. Got it. And uh just because you brought up about the leases, the way they were written down. Can you can you give the listeners like two things that they have to maybe include in the leases? Or what are the two big things that you would include in yours?

Tanh 21:30

I would say the number one thing you should have in there is a personal guarantee. So for those who don't know, a personal guarantee is just like what you would sign at a bank. Okay, that's a guarantor.

Reshma Vadlamudi 21:42

Yeah.

Tanh 21:42

You're the guarantor on the note. If you sign a mortgage, they're gonna want you as the guarantor. So you essentially sign a separate document saying that if you reneg on this mortgage, late payments, no payments, etc., the bank can come after you for whatever their losses are.

Reshma Vadlamudi 21:59

Yeah.

Corporate Guarantees And National Tenants

Absolute Net Leases And How Landlord Liability Shifts

Tanh 21:59

And Possibly more. So in a lease, it's essentially the same thing. They sign the lease, and in the personal guarantee, it says you're obligated to pay this rent over X years. If not, we can come after you. That's probably the biggest thing you should look for. But a lot of times as well, if you look if you have a national tenant, like a Starbucks or a McDonald's, if they sign it, you don't really need a personal guarantee because it's a corporate guarantee. Number two on what you should look for in a lease. I would say you have to make sure that the liabilities on the landlord are fair. But that also depends on what type of lease you have. So another lease that we haven't talked about is called an absolute net lease, which is essentially almost like a ground lease. But an absolute net lease essentially puts all of the burden or the financial responsibilities on the tenant. This makes it a lot more of a passive investment to the owner or the landlord. So all the bills, the tenant pays. If something messes up, they pay it. You just sit back and collect a check. That's the absolute net lease. Very similar to a grand lease. It's actually, I think a grand lease is a subclass of an absolute net lease. So when you're looking at gross leases, modified gross leases, net leases, the responsibilities are important because you have to know who is on the hook for what. Because if you don't, that's gonna mess up your underwriting and your evaluating of the property.

Reshma Vadlamudi 23:43

Yes.

Tanh 23:44

For example, if HVAC replacements are on the landlord and every HVAC system in this building is old, you're gonna be forking out a lot of money to be taking care of that. Yes. So that comes down to you having to figure out obviously the the capex in order to know whether or not it's gonna be a good investment and how much money you have to put into this building. Then again, you have to know the responsibilities of the tenant and the landlord.

Reshma Vadlamudi 24:13

Yes.

Tanh 24:14

If the tenant is responsible for that HVAC, you can take that out of your underwriting. It's their responsibility. And you have to make sure that the tenant is aware of that.