Frequently Asked Questions
About Investing in Post Offices
What happens to my post office when the lease terms expire?
In the overwhelming majority (99%+) of cases, the USPS will renew the post office's lease once it expires. However, in the very rare case that a post office becomes vacant, it is typically easily retro-fitted to be a professional office (law office, accounting office, etc.) with very high rents. This is because the buildings are built to extremely strict postal service specifications, which can cost ~$200+/- per square foot to build (compared to regular commercial buildings which typically cost $30-$40 per square foot). Some post offices have even become banks after lease terminations due of the solidity of the structure and the loading docks.
What do you think is the "right" location for purchasing a post office?
Location depends on personal preference and investment objectives. Many investors prefer post offices in larger cities where there is a higher residual value because, should the building become vacant, it is typically easier to rent to someone else. However, on the negative side, the postal service can more easily consolidate and close these urban post offices when there are numerous others nearby. So, many other investors prefer rural locations where the postal service has much more limited ability to close or consolidate a local post office.
What is the deal with CB Richard Ellis (CBRE)?
In 2011, the US Postal Service agreed to hire CB Richard Ellis as their exclusive real estate broker, representing them in certain lease negotiations and sales of postal service-owned facilities. Through this exclusive arrangement, the postal service pays CBRE for their services (~3% fees). However, this does not stop CBRE from attempting to collect commissions from landlords of 3-5% on the gross value of the leases and lease options. No landlord is obligated under the agreement to pay any commission to CBRE.
What should I do if CBRE wants to charge a commission?
This is really simple. Call me at 1.800.393.2761 and refuse to pay them a commission.
How do you determine the net operating income (NOI)?
When there is no maintenance rider, subtract $1.00 per square foot on average from the rent. If there is no tax rider, simply subtract the annual property taxes. Subtract the property and liability insurance.
What are the capitalization rates (CAP rates) for post office investments?
Generally speaking, CAP rates reflect the investor's rate of return on a percentage basis. Over 30 years, CAP rates have varied for numerous reasons. Some years, they were affected by the national economy and inflation rates. In other years, the supply and demand for owning USPS leased facilities would be weak or strong depending on things like the difficulty of negotiating with CBRE.
What do you consider the biggest risks when investing in post offices?
I find that investors often overpay for their post office investments. In these cases, the rental rate is probably either higher than market and will be reduced upon the next lease/option renewal or the landlord's rate of return will drop dramatically. I also find that many investors in leased post offices never take into account that postal rents are flat for 5,10,15, or even 20 years and do not account for CPI or COL rate increases. Also, by not belonging to a membership association like APO, purchasers of post offices often do not know how to find comparable rents, comparable terms, and average cap rates that post offices are selling for.
What do you consider the biggest benefit to investing in post offices over other commercial real estate properties?
Regardless of what you may hear, the postal service is still a quasi-governmental agency which retains many of the rights of the federal government, such as eminent domain. Therefore, one of the biggest advantages is that the federal government will not let the postal service go broke, so your rental income is effectively federally guaranteed. Considering that the rent is guaranteed and the return on your investment should be at a minimum of 8-10% all the way up to 15-20%, there is absolutely no comparison to traditional commercial real estate properties. Note: All investments are subject to risk of loss.
Should I be concerned about post office closures?
In 2007, the US Postal Service announced that they would be closing a large number of post offices, but after substantial push-back from Congress, they made an agreement to cease closures. However, the USPS continued to find workarounds such as reducing hours or closing on Saturdays, which often caused postmasters to quit (which allowed the USPS to replace them with older retired people at significantly reduced wages). They are also occasionally using the excuse of exorbitant rents to force some post offices into suspension or closure. In these instances, owners may appeal the Postal Regulatory Commission (PRC) if they are unfairly treated (and in most cases, the owners win). Prior to 2007, 200-300 of the 25,000 leased facilities in the U.S. would typically close each year due to bad conditions, asbestos, etc. Even now, only ~2% of post offices are suspended or closed each year. So the risk of closure or suspension is fairly small, but it is higher in urban areas with multiple post offices where the postal service can indiscriminately close any facilities they want.