Buying first warehouse.... words of wisdom?

[WestCoast]

I have a growing business that is in need of a larger building. I am thinking of buying a 10000sq ft warehouse in town.

Would love feedback.


Currently Renting

We rent around around 6000sqft of light industrial for $2500/month gross ($.40/sq ft). Not a great building, functional, but lots of leaks and no HVAC, etc.

We need around 8000sq ft - so figuring paying more like $.45/sq ft for a slightly nicer building we'd be around $3600/month


Potential Purchase

There is a 10,000sq ft building with two cargo doors, loading ramp, dock and high ceilings very near our current location. New roofing, easy access off the street.

It's near a sub-station and the railroad tracks, but it's not a bad part of town at all. Just... industrial. Older building (1965? Brick/Masonary construction) with new paint so it looks fancy

Offered around $775,000 and my broker thinks they will take $725,000.

Since I will buy the building and install my company in it, we should qualify (if I can survive the paperwork) for an SBA loan of 10% down. I've got that in cash, so we're cool there.


The note will be around 5.25% for 20 years and that means around $4400/month (without taxes, insurance, etc). So, maybe $5k/month in total cost to me the owner.

If I charge my company $.40/month in rent (being conservative even though the building is nicer than our current location), that's $4000/month gross rent I collect to pay the note.

Obviously we're not cash flowing here, I have no interests in being a 'real estate tycoon' I just see a chance to get a building for reasonable price per sq/ft and have my operating company cover most of the costs.


That will increase expenses at the operating company, but frankly I could use some more expenses or the IRS is going to get it all at tax time. We aren't rolling in dough, but we do pretty well. Does this pencil?


--
So, good people, what do you say? My company could also take 8000 sq ft and sublet the other 2000 to make up the difference, perhaps at a higher rent?

Is it crazy to buy into a commercial building that doesn't cashflow?

What am I missing, what am I not asking?


**I'm going to duplicate this post over at Bigger Pockets to get responses there too, I want love feedback from every angle**

 

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[Runum]

Are you projecting annual building maintenance costs?

 

[Ska2free]

Hi west coast...sounds like we are in similar situations in more than one regard!

We just moved from a 2500 sq ft building to 10000, which we built with SBA financing (504 program). We only occupy half so far, and will sublet the other side until we are ready to expand. We just closed on the SBA portion of the loan Wednesday...but don't know the exact interest rate until the debenture is final, one of the aspects I didn't like about going SBA.

But on the whole, we have had a really good experience with it...as long as you are working with a good SBA group and a banker who's familiar with the process, it is not too painful. It is a fair bit of paperwork (but we do govt contracting so I'm used to boatloads of paperwork). The bank basically finances 50%, the SBA 40%, and you put 10%. The 20 yr fixed note is nice, but they do have a prepayment penalty.

One thing that may be an issue (or good, if you are looking for extra expenses) is that the SBA requires that the rent paid be equal or more than the monthly note payments plus taxes and insurance. Or at least theynhave in our case. So we are looking at a huge rent jump ($1500 to $4200), but it is justifiable bc of improved space and because we own the asset. We also set up a separate llc to own the building, the SBA is fine with that.

When calculating loan payments, remember that 40% of the total will be with a traditional bank...terms probably vary, but ours are 10 year fixed rate w balloon, 15 yr amortization.

Process takes a while (especially long in our case, new construction), but it can be worth it. Feel free to pm me if you have questions...we are riding out a hurricane, hoping the new building fares well!

 

[bflash98]

That price seems high at $72 psf. I work with large industrial buildings in the 200k sf + range in different markets than where you are located so you need to have your broker do some research to find the correct price.

Keep in mind that people buy industrial buildings for the cash flow. Have your broker model the rents and the expenses (not including interest expense) of the building and see what the cash flow will be for the first year. This calculation is called the net operating income (NOI). You then need to find out what % return (usually referred to as the cap rate) people are looking for to calculate the sales price. The formula is: Sales Price = NOI/% return. Ask your broker what the current cap rates are for a building like this. Keep in mind the cap rate will be higher for more riskier buildings. This would include a building that is empty because it will take time and money to get someone in the space.

Make sure your broker shows you comparable building sales and leases to justify his/her cap rates and rental rates. The land could be worth more than the cash flow from the industrial buildings and that could be driving a higher price for the building.

 

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[DeletedUser2]

Rather than do an exhaustive analysis on the cashflows of the building, let me go a different direction.

is your business growing fast enough that you could see having to move into a 20K or 40K building within the next 3-5 yrs?

if so, then There might not be a good enough reason to buy, when you can still rent, (its a down market, alot of landlords are begging for tenets)

if not, then why not? what could you be doing in your business so that you actually need a 40k SQFT building in 3 yrs? I think that would be alot more fun.

This from a guy who LIKES to buy buildings, just an FYI.

D

 

[WestCoast]

@runum - unlike residential where I was always taught that expenses = 50% of gross rents. I am not sure what to use as a reserve. Do you have a formula you use for maintenance, etc?

@ska2free - Firstly... congrats! Second... aside from growth, what was the big reason to buy for you guys? That is a big jump in overhead costs! My operating company won't be buying the building in this case. I will buy the building personally through some wholly owned LLC I make up and that LLC will lease to my company. I am told as long as 51% of the unit is filled with a quality tenet, I will qualify for the SBA loan even if all the mortgage is not covered.

@blflash - I am 'told' that prices around here used to be $110/sq ft. I have nothing to base the price on other than comps... and $75/sq ft seems to be about the going price for buildings of roughly this size. If you have data that says otherwise, that's exactly the type of information I'm after!

Also - I calculate the cap rate at just under 7.5%. Seems ok, not amazing, but very reasonable for here. What do you think?


@zend - Our business continues to grow rapidly, but I simply can not imagine that it will ever need more than 10,000sqft. We are growing worldwide, but, well, it's a super niche we're in and frankly that market isn't THAT big. I'd love to think so, but we need about 8000sqft now and I could see us growing into 10,000 sooner than later, but I think that should do it realistically.

 

[DeletedUser2]

great answer!

good luck!

 

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[Ska2free]

@ska2free - Firstly... congrats! Second... aside from growth, what was the big reason to buy for you guys? That is a big jump in overhead costs! My operating company won't be buying the building in this case. I will buy the building personally through some wholly owned LLC I make up and that LLC will lease to my company. I am told as long as 51% of the unit is filled with a quality tenet, I will qualify for the SBA loan even if all the mortgage is not covered.

Thx! A few incentives...we wanted a customized space, got a great deal on the land. The jump is big, but with two stories of office built into our half of the warehouse we actually get something like 7000 sq feet of working space (2/3 of which is office, the rest warehouse). It's a good way for us to write off the expense in the operating company, move it to passive income on the other. I'm much happier paying rent to myself than to anyone else! As soon as we find a tenant for the other side (the other 5000 sq ft), we should be able to build up some capital to put toward buying other investment properties. So it helps the current operating biz, but also moves us toward the goal of passive income in the future.

So for us the deal also cash flows...a little without a tenant, a lot with. This is paying market rate rents from the operating company...here, roughly $1/ft for office, $0.67/ft for warehouse.

Definitely check the SBA tenant requirements...there are several programs I think, ours was for owner-occupied, and we not only had to occupy more than half but at some point we should occupy entirely. (I'm told this is rarely enforced, and is near impossible to enforce, but it's our longterm plan anyway.)

 

[White8]

That seems high to me for warehouse space. I would take a look at loopnet and wvmls.com as well as craigslist and see what else is out there. I'm sure if you talk to the right people there are properties that have been either on the sale or lease market that have been sitting for a long time that the owner might dump. There is an 8000' warehouse on the other side of the fence from me that has been for sale for over two years.

A little secret is airport property. It depends on what the airport will allow as far as non aviation businesses but at least around Salem land leases are around $.20 per foot annually. If I remember correctly you said in a post that you are in the Portland area so Hillsboro, Troutdale, or even Mulino might be options. A 10,000' pole building with an office shouldn't run more that $150k to put up.

 

[biophase]

I've just recently rented warehouse/flex space also. Wouldn't the reason to buy a warehouse vs renting it be because your payments buying are cheaper than renting? For me buying would have been cheaper than renting for most of the spaces I looked at. I just didn't want to own a space right now for the reasons zen******* mentioned.

Seems to me that renting would be better for you.

If your business changes and you need to sell that warehouse, I don't see how you will get another buying to buy a negative cashflow space unless they want have a business also.

 

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[WestCoast]

Appreciate the input, keep it coming. This is a big decision for me and I am looking far and wide for experience and information


Another question popped up: It seems the SBA loans and most commercial loans are 20 year notes, however, it seems they can be (or are automatically?) called at year 5?

It's almost like a 20 year ARM that resets after 5 years. Is this normal, SBA only thing, am I even understanding this correctly?


I don't have a crystal ball for interest rates, but obviously with the Fed printing money, they are likely going to go much higher.


Thoughts?

 

[Ska2free]

Another question popped up: It seems the SBA loans and most commercial loans are 20 year notes, however, it seems they can be (or are automatically?) called at year 5?

It's almost like a 20 year ARM that resets after 5 years. Is this normal, SBA only thing, am I even understanding this correctly?

I don't have a crystal ball for interest rates, but obviously with the Fed printing money, they are likely going to go much higher.

We have used SBA loan programs twice, and never heard or experienced anything like a 5 year call. I'm not sure if you're learning about SBA loans from a bank, a CDC, or the SBA website...you need info from all 3 at some point.

Definitely spend a little time on the main SBA.gov website reviewing their loan programs...the main two are 7(a) and 504. In the first, the SBA is just the co-guarantor and the bank pretty much makes all the decisions about rates and terms. In the latter, it is (I think always) a 20yr fixed rate term for 40% of project cost. They are bundled with other 504 loans, and have significant prepayment penalties b/c they become part of the bureaucratic machine and are hard therefore to extricate yourself from...I think that makes it fairly unlikely that you'll see a 5 year change. Maybe that info is from the somewhat new 504 refinance program though...I don't think that would apply to you.

If you're not working with one already, the SBA site has links to active CDCs (ummm...community development something or other? They basically get paid to put the deals together). Find one in your area, that preferably has a working relationship with your regular banker. It can work otherwise, but it will make more work for you.

Hope that helps.