Inland Empire Shopping Center For Sale – Calling All Investors Seeking To Lose Money

The package embedded below (see update below) just came across my desk today.  It is an offering for a shopping center in Moreno Valley, CA (Inland Empire).  The property consists of three ground leased fast food pads (El Pollo Loco, Del Taco and Wendy’s) as well as approximately 22,670 square feet of retail shops in 3 separate buildings all sitting in front of Walmart (not included in offering).  The surrounding trade area has been severely impacted by the housing crisis and the commercial market has not fared much better although this is not readily apparent from reading the marketing materials.  From the brochure:

The retail market in the Inland Empire continued to be impacted by strong demand and limited existing inventory for retail space in 2006. The overall vacancy rate for 3rd quarter of 2007 raised slightly to approximately 6%, with 14.13 million square feet of retail space under construction and an additional 41.47 million square feet of space planned to be developed. As a result, the Inland Empire is destined to remain the driving force in the Southern Californian economy with a 2008 projection for retail sales to be in excess of $51.6 billion.

I’m pretty sure the Inland Empire is no longer a driving force in the Southern California economy – not in a good way anyway.  To support my theory, I have created a visual representation of exactly how the surrounding trade area has fared:

Moreno Valley

The red star on the right is the subject property.  Orange dots represent properties in pre-foreclosure.  Yellow dots represent properties up for auction.  Green dots represents REO properties.  White dots represent short sales.  Not exactly the depiction of stability.

So all of this is fine – and to be expected for this area.  What is not fine and should not be expected is the pricing of this offering.

If I back out the income from the 3 fast food pads, I am left with scheduled income of $806,282 / year.  This translates to $2.96 PSF / month in current in-place rent.  Anyone active in the market will tell you that buyers looking at an asset of this type and in this location will never give a seller credit for income anywhere near this range.  To be honest, $1.50 PSF / month is generous.  If I apply the revised rent of $1.50 PSF / month to the rent roll, I get a revised annual income from the shops suites of $408,060.  So as not to be too overly contrarian, I will give full credit to the 3 ground leases which amount to $228,000 annually between the 3 tenants.  I will take a vacancy factor from the shop rents as it would be imprudent not to do so.  In my opinion, vacancy factors for Inland Empire multi-tenant retail properties should be at least 15% but I will back off that belief and only apply a 10% vacancy factor here.  I will also take a small management fee and reserve from the total income to determine an NOI as viewed by the current marketplace.  The final figures look like this:

Fast Food Rents


Shop Rents (Written Down to $1.50 PSF)


Less Vacancy (10% of Shop Rents)


Less Management Fees (3% of Total Income)


Less Reserves ($0.15 PSF of Shop Space)


Net Operating Income


The figures don’t look much better at $1.75 PSF or $2.00 PSF.  Using $1.75 PSF for the shops would yield a revised NOI of $631,940.  Using $2.00 PSF would yield a revised NOI of $691,109.

Compare these revised NOI’s with the NOI in the marketing brochure of $991,714.  The “current” NOI is then capitalized at 7.50% resulting in an asking price of $13,225,000.  Let me further break down this offering price.  Let’s assume that the ground lease pads would command a 6.75% CAP rate in the current market.  This would mean the 3 ground lease pads represent $3,378,000 of the purchase price ($228,000/.0675 = $3.378M).  Subtracting this from the asking price leaves $9,847,000 for the shops which is equivalent to $434 PSF!!!!!  I can tell you with a very high degree of confidence that there is not a single multi-tenant retail building in the Inland Empire that is worth over $400 PSF today.  Period.

Even using the proposed capitalization rate of 7.50% (which is way too low in my opinion) I arrive at the following “true” values for the property:


$1.50 PSF

$1.75 PSF

$2.00 PSF





CAP Rate








It should be noted that the property is being offered with an assumable loan with a current balance of approximately $8,665,000.  As far as I can tell, this property is not worth the debt which encumbers it.  The reality is really worse than the values depicted in the above table.  True capitalization rates for this type of asset are likely approaching 9.00% (if not higher) and most investors would not be comfortable with a vacancy factor as low as 10% in this trade area.  Additionally, my quick look at the property does not even take into account loss of rents for tenant turnover (which will undoubtedly happen in the not-to-distant future) or expenditures for tenant improvement allowances, leasing commissions and carried expenses.

The sale of this property in its current condition and anywhere near the asking price is a lawsuit waiting to happen.

Clearly, there are still some owners out there that have not come to accept the current state of the market.  The bid/ask gap remains wide and transaction volume will not return until it narrows.  Most of the give will come from the ask side of the equation.

UPDATE: I have removed the embed of the marketing package at the request of CBRE.  I don’t believe I needed to do so and even sought legal advice on the matter which I have posted below:

Confidentiality agreements are common, of course, to the extent in the public domain unenforceable.

The worst thing is that humble opinions such as yours make situations like [the one depicted in this post] look very silly for CBRE IMHO.

All that said, not worth the legal brain damage in my opinion. I’d take it down and tell the world why.

So there you have it.  I don’t want any brain damage.  If you really want to see the offering memorandum you can download it here or here.

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  1. excellent analysis, really shows how delusional sellers remain in this market and suggests that it's going to be awhile before prices bottom.

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  5. @repo4sale says:

    I have bought and sold over 300 properties in So. California. Right now, it's like 10 minutes after the 1st plane hit tower 1. The 2nd plane is the 2nd wave of foreclosures, all homes due to unemployment, and over$412k as well as next wave of "defaults". The 3rd plane hit, like 911, is really a hit to COMMERCIAL REAL ESTATE. Loans have dried up and are "NOT" available even at 10% rates! Yes, 10% will NOT get you a commercial loan. So, unless it's cash(& seller carry) buyers, with a "damaged cap rate of 20%" guaranteed by the seller's note, your Frigging legally nuts to buy any commercial property.

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