Explain Commercial Real Estate Please

[Kung Fu Steve]

Hello all,

I have an opportunity to move locations. They are offering some outrageous things such as buying out my current lease, free build out, and 9 months free rent. They are also in the market to sell. They are trying to "get out of it". The building is pretty much empty. Out of 8 spaces there is a Bridal Shop (which takes up 2), a closed down fast food style sandwich shop, a a shop officially named "Piecemakers" which is a glorified bong shop. Funny while I just visited the building about 10 minutes ago 3 cops were walking out of there on a call. They claim it's just for tobacco use.... right... we all believe that one...

Here is my question. What is going on here? Are they going into foreclosure? Apparently they want out badly. They are looking to sell about 1.5-1.8. I don't know actual numbers so it's all speculation at this point. I have a meeting with them next Wednesday.

The first thing I think would be to get rid of the piecemaker shop. I don't need my people being anywhere near that crap. Especially the kids I'm teaching to be drug free.

I'm just trying to figure some scenarios of what could be happening could someone explain my options? Maybe I should just buy it? Can I do a "condo conversion" with commercial buildings?? To give you a picture of the area, it's extremely busy but there is a TON of spaces open. Commercial real estate in this area is closed. Even if we did buy it, I don't know that I could fill it.

In any case, I'll have some leverage to negotiate my current rent.

 

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[Salinger]

In response to the questions you posted:
What is going on here?
It could be that they are just trying to get tenants any way they can. The commercial market is very tough right now and landlords are making sweet deals. It is much easier to sell a fully leased building than a building with a lot of vacancy.

Are they going into foreclosure?
Check with the assessor's office.

could someone explain my options?
Negotiate a lease, negotiate a purchase, negotiate options, go somewhere else, do nothing.

Maybe I should just buy it?
Sure, maybe you could get a good deal.

Can I do a "condo conversion" with commercial buildings??
Yes, it's possible. Depending on the structure of the building and the nature of the city, it could be expensive. Do some research before jumping into this. Also, who will buy the condo units once the conversion is complete? Are the tenants interested and/or capable? Would investors buy them? Why would they choose a commercial condo unit in this building over other investment properties? Keep in mind, it is very tough to get financing on commercial deals right now.

 

[hatterasguy]

Commercial space like that is brutal right now, personaly I wouldn't touch it with a 10ft pole unless it was a screaming steal, and I had the cash to buy it outright.

Don't consider this place unless you can afford to carry it totaly empty for a year or more. Commercial property can sit vacant for years...

 

[StreetsofSilver]

The first thing I think would be to get rid of the piecemaker shop.

Easier said than done. How long is their lease for? As a new owner you inherit the lease and the terms. So if they are in a 5 year lease and it is only the 1st year...


Can I do a "condo conversion" with commercial buildings??

You could but the building would have to be re-zoned by the city and brought up to code. This can take months to get permits so you would need to have reserves.

Let us know the numbers when you get them. Price, square feet, etc.

 

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[RealOG]

How about this: sign a new lease with an option to buy at today's price, good for 5 years.

I agree the with Hatterasguy, commercial property is hurting right now and expected to hurt more in the future.

 

[Kung Fu Steve]

This deal really scares me. There are tons of commercial units vacant in my area. I mean within a 1/4 mile there are give or take almost 20-30 vacant commercial spaces. In my building alone there are 7 vacant spots out of 9, in the two buildings across from us there is one building completely empty with about 6 spots, and the adjacent building to it with only 1 out of 6 filled. Across the highway there are 2 out of 4 spots filled and another building over there with 3 empty out of 3. And then the building that we are talking about here only has 2 spots filled. One with a not so hot tenant and the bridal shop which takes up 2 spots. It does look like there is a driving school that will take up one spot there soon. IF it's legit. Looks like they were supposed to open in May from the sign on the door but no lights on, nobody there. The town my school is in was way overbuilt extremely fast. I think it will catch up eventually but people's perception of the economy is going to need to change to get things moving around there. Just down the highway about 5 miles is a city that exploded. One of our star cities. They just built a ginormous super target and a TON of commercial spaces. It's a goofy set up, kind of like a quaint little down town. But out of probably 20 spaces there only 3 or so are filled and It's been over a year... I just don't understand how they can float these things!

The one thing that is really intriguing though is the free build out, they would buy out our lease, and give 9 months free rent. A bigger space and less rent... seems like I can't go wrong. But I do have a high end retail location right now, TONS of parking (which I need) and great visuals, even with the building empty there is a very successful restaurant across out parking lot and an AT&T corporate store next door to me which drives a lot of traffic. The location is just perfect but since rent is my biggest expense... man... I could do a lot of things with 9 free months of rent...

Keeping this all in mind, one of my most valuable "advertising" that I have done has just been the sign on the building and the phone number in the window. Tons of people drive by on the highway all day long. So I'm not sure it's worth the free rent for 9 months to give up that visual.

We'll see Wednesday when I meet with them. Thanks for the response guys, I really appreciate it.

 

[I85]

There are so many types or leases and variables in the leases, that it would be impossible to really say. Also, it would be hard to compare two properties without knowing the location. I would recommend you find an attorney up there that knows a lot about commercial RE in the area. They will be more familiar with the pros and cons of each location and each building. They will know what the typical lease is around there, since they read tons of them, and should be able to help you negotiate an even better lease. They will also be able to catch major flaws or negatives in the lease.

 

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[Kung Fu Steve]

So I met with the owners the other day. They are just trying to get out of the building. They owe the bank quite a bit but I just received and e-mail from them today saying the bank will settle for 1.6 mil. The building cost 2.5 to build. Obviously this would mean there is quite a bit of equity included in the deal... It sounds like a pretty sweet deal... But it scares me quite a bit. I could easily move to that location and increase my square footage (which is getting to be a problem). A family member of mine is looking to expand and start a new location of her store which I think would do real well in that area.

What can you guys tell me about the equity? It sounds like a good deal to me but I also know that a building is only worth what you can sell it for... It seems to me like we could fill up the building fairly easy and it would mainly be our businesses. That way if there was any real trouble we could figure it out far in advance instead of some fly-by-night start up business who just locks the door and skips town. Please correct me where I am wrong but the value of a commercial property like this is based on the rent you are receiving from your tenants...

1.6 million sounds like a lot of money... but coming in with 10% down (160,000) doesn't seem so far out of reach...

 

[RealOG]

One strategy of purchasing value add opportunities (which is what you are proposing) is to buy below replacement cost. If your figures are accurate, you are buying at 64% replacement cost. That's a good deal, as many investors target 65% as their target.

I would advise two things:

1. Think about cash flow - you are a martial arts instructor and thats how you make your living. Make sure that moving into this building makes sense to you as a tenant. You dont want to risk your business at a time like this if it is successful. Make sure that your current business is better off with this move and that you will cash flow (or at least break even) with the building from an investor POV. Dont forget about taxes, insurance, CAM, utilities, etc.

2. Begin with the end in mind - this is a value add opportunity, meaning you are buying a distressed property and are going to add value to its current state (probably by leasing it up). Make sure that the tenants you put in and the way you run it are conducive to a future sale. For example, if I was looking at buying a retail strip (as an investor) and I saw a center that was completely filled with one family's various businesses, I would be suspect. I might suggest you get professional management to help run the place, deal with CAM, and lease the place for you so you can focus on your martial arts business.

Congrats on the data digging here. It impresses me to see folks step outside of their comfort zone!

 

[Salinger]

Can you actually get it at 10% down?
You might if you can get an SBA 504 loan. A 504 requires your business to occupy at least 51% of the building. Maybe with your family member in one space you would be able to qualify. You may need an LLC structure combining both businesses. If you can't do and SBA504 you will likely need to put more down.

You should figure out the value if you fill the building and sell to an investor.
What is the square footage of the building?
What would be the net lease rate you'd need to offer to fill the building?
What is the Net Operating Income, both current and projected (including your business)?
Will the building's income, with your business, your family member's business, and current leases, cover the debt service?

 

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[hatterasguy]

Commercial RE is valued based on income.

First you need to find the CAP rates for similer buildings like this. Whats the going CAP. Whats the going lease price per SF? Than you need to figure out a vacancy rate which I am not sure how to do on something like this.


You need an advisor/knowledgeable partner.


FYI properties like this you usualy need 30% down, 10% would be a surprising. Lending has changed I don't know what the banks will let you do anymore. The bank might not let the currant owners carry part of that 30% as a note, they might want you to have a lot of blood in the deal.

 

[Kung Fu Steve]

Yeah, the martial arts business is what I know. I'm trying to wrap my head around this whole thing. I'm guessing I'm just not ready for it yet. 10% down would be easy to manage... 30% might be a little tougher. As far as occupying 51% of the building... that might be a possibility - but I'd rather have more tenants if I can get them.

Funny thing is, my current land lord finally brought his son in for classes after talking about it for a year. He offered to give us some more space for cheaper rent... The problem is I don't think I could quite afford it yet. Within the next year I believe I could but now just isn't the time to expand. BUT - if I were to own the building I would have more space and cheaper rent... The con is that it isn't as visible as much current spot, I really have a great location right now...

This is all really good information though guys, mind keeping it coming?

 

[hofster]

If you are ready to change your life through investing in property then you have come to the right place. Don’t reinvent the wheel. The information on this website will provide you with the necessary knowledge and tools that will guide you to become a successful property investor.

 

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