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REAL ESTATE Commercial Property - highest and best use?

phlgirl

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Aug 29, 2007
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Years ago, I bought a duplex in center city Philadelphia. As long as I have owned the building, both units have been used as residential but the property is zoned commercial.

Lately, the street on which the property is located, has been undergoing a bit of a revitalization. Other buildings on the block/street, which in years past had also been used for residential, are now being converted back for commercial purposes. A coffee shop has moved in, a few art galleries and one or two boutiques.

One of the books I am reading this month is 'The Complete Guide to Buying and Selling Apartment Buildings' (thanks SteveO) - so, of course, this has me thinking about how I might improve the NOI of my property.

My question is what things do I need to consider in evaluating the best use of this property? My husband has experience in construction and estimates that the cost to convert the unit would be 25-30k. So my logic tells me that as long as I can increase the value of the property for more than that amount, it is a smart move? The end goal is to sell the property and carry forward the gains into a larger commercial project.

The first floor unit is 800 sq ft and rents for $900. I have a call into my appraiser to find out what the average price per sq ft is for both lease and sale of commercial space in this area.

Any suggestions as to other things I should consider/research? My experience is in residential real estate..... so just want to make sure I am not missing anything here.

Thanks.
 

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SteveO

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You should certainly evaluate and entertain the idea of this. You should also find a commercial agent and determine what the value of the land would be as well. Especially if the land supports the development of a larger commercial building.

It shouldn't be too difficult to find this information out. As you stated, the NOI is the key to rally around here. Find out what is capable of being built and/or what the lease rates would be. You might do some investigation on the commercial vacancy rates and the direction that this is going in the area.

I have seen a couple of incredible transformations of properties where an older buildings were made to look modern.

Keep us informed.
 
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phlgirl

phlgirl

Bronze Contributor
Read Millionaire Fastlane
Aug 29, 2007
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Philadelphia
Thanks, Steve.

Unfortunately, I do not think it would be possible to get much more space out of a rebuild - the building is similar to a center city row home - with adjacent properties on either side. There is not much space to the rear either - just a little room for garbage storage, etc. You have me thinking now though.... there is a full, unfinished, basement. Perhaps, with an update to the staircase (old and dark), the basement might be better utilized space? Not sure if basement space adds any value - will have to investigate.

I spoke with my appraiser and a good realtor and they tell me I should expect $20 per sq ft for commercial rental space. With 800 sq ft, this equates to roughly $1300 per month - a $400 increase. Total increase of $4800 per year in NOI. I need to do some more homework on cap rate for the area, but if we said it was 10, this would mean an increase in value of 48k, right? Seeing that the rehab would cost 25-30k and I would experience vacancy of the unit throughout the rehab period and, potentially, for a few months afterwards - not sure if it would be worthwhile to make the conversion? Seems a bit skinny....

Your comment about the direction in which commercial RE is headed in PHL is a point well taken. Although it seems that this particular segment might be on an upswing, I should probably check the city overall. Any suggestions as to how to best do this? Or is this something I am going to come across soon in the book? :)

Thanks again.
 

SteveO

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Is it $20 for your location or is that the average in the area? Many businesses need storage so the basement may get some rent. You need to calculate vacancy rates into the equation. The vacancy for your duplex may be lower than the commercial vacancy rate.

What types of businesses would be a good fit for the property?

Tune in to the local news from the commercial arena. Call some agents and ask where the local publications are at. Do an internet search. Check the large brokerage firms for data on their websites...
 

Sid23

Bronze Contributor
Aug 9, 2007
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Is the whole block row houses? If there are other uses on your block, i.e. commercial, you may be able to add more space by building up.

While it may not seem to "fit" at this time, if the area is indeed undergoing a resurgence, the City Planning Department may be happy to rezone the property to allow a taller building.

If that is the case, you could look at selling to a developer. If that plan looks feasible, you could also try to acquire the adjacent properties, hold all three while the area redevelops and then sell all 3 to a developer as a package deal once the rest of the street changes.

You would have to wait longer, but you could command a fortune if you are one of the last undeveloped sites in an area.
 
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phlgirl

phlgirl

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Read Millionaire Fastlane
Aug 29, 2007
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Philadelphia
The appraiser and realtor are telling me $20 for this specific area. The area is known as Fabric Row - 4 blocks, which used to be packed with vendors selling any & all fabric/sewing products. Although many are still present, over time, the demand could not support all of the space and some began to convert to residential, as best use.

Now, with people moving back into the city, some are converting to provide new residents with services/products they might want/need. In the past 6-12 months, for example - in storefronts very similar to the size of my own - we now have a coffee shop, a higher end shoe store, a small spa, a bookstore, art galleries, etc.

I have contacted both the owner of the shoe store and the coffee shop - to inquire about the changes in the neighborhood and to see if they would tell me what they were paying in rent (after checking public records and seeing they do not own). Have yet to hear back from shoe vendor and, although he was very nice, the coffee shop owner was not comfortable sharing rent $ with me.

I am thinking the space would be great for some type of retail?

Vacancy is a good point too - which probably makes this an even skinnier deal. Perhaps, best to sell and offer as res. or comm. and let buyer decide.

I will tune into the commercial news in PHL. Thanks for the feedback - much appreciated.
 
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phlgirl

phlgirl

Bronze Contributor
Read Millionaire Fastlane
Aug 29, 2007
813
173
85
Philadelphia
Sean -

Yes, almost all (if not all) of these streets are 'row home' type structures. There is priobably a better term for what I mean.... but all of the buildings are directly adjacent to one another, excluding, perhaps, some type of alley way.

For now, it appears the only space being used commercially is the first floor unit. I do not know of any buildings, in that area, which utilize the upper floors for commercial space. In my building and most others, the 2nd and 3rd floors are residential. Great idea about the height, I just called the city and they tell me the limit is 3 stories or 35 feet (which is where we are now). Of course, I can apply for a variance but it would be non-conforming and I would need the support of the neighborhood association and councilperson of the district. I will make those phone calls and feel them out....

I did have a conversation with the head of the neighborhood association last week and they seem to be very supportive of people looking to convert back to commercial - said they would do anything they could to support new businesss activity in the store front (even if it was not in exact accordance with zoning conduct regulations). He also told me that they have started a new, monthly, '4ths on 4th Street', where every 4th wednesday of the month, vendors/galleries stay open late and have wine/food tastings, etc. Finally, he mentioned that the association is in discussion with the city to get pedestrian lighting (night-time streetlamps) for this strip.

Love the idea of buying out the neighbors and holding position - we have a lot of our capital tied up in other projets right now so not sure that is feasible - especially since nothing is cashflowing in center city PHL right now.

Thanks for your input!
 

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