Commercial Real Estate Investment - Banning CA

[Account Closed]

I am in the process of closing on 15,000 sq foot building in Banning California that is currently vacant. 

I am wondering if this is a wise investment?

Purchasing for 1.1 million all cash no financing, the goal is to get a tenant in as soon as possible.

Not sure what realistic expectations are in this market of finding a tenant quickly but hoping to find one in the next 3-6 month and cover expenses out of pocket in the meantime. 

Looking to get anywhere from 75 cents a sq ft on up. If I can it makes the cap rate very appealing at 12% but getting cold feet over the amount of time I may be stuck sitting on a vacant building.

Thoughts on this type of deal and investment strategy? All help appreciated. 

[Michael K Gallagher]

Hey @Account Closed congrats on the deal!  I always feel its important to remember why you went after this building in the first place when feeling a little cold feet.  There must have been features that you liked and that met your requirement initially, I find it helpful to look back at that and reflect on why you chose it in the first place when you were looking for an investment.

As far as filling the building, are you planning to manage/market the vacancy yourself or are you seeking the help of a local broker/PM?  If you are already set up with the later, It might be worth a discussion with them to understand their sentiment around it, and what they anticipate for vacancy.  I'm not sure what kind of building it is but with that kind of size I'm guessing its a warehouse, and while I've never done a deal in Cali, I've worked on Warehouse deals in probably 6 states, now, and every-time its very competitive from a tenant's point of view.

[Bjorn Ahlblad]

Vacancy for commercial real estate is huge these days and time to fill is not very predictable. Some warehouse spaces stay vacant for years. So unless you have an endless money pile and don't really care you might want to review your options and revisit your goals. There are plenty of investment opportunities for the kind of money you are talking about. That is my 2 cents, take it for what it is worth. All the best!

[Account Closed]

Thank you for the responses Michael and Bjorn. I have reached out to the broker and he has informed me he has a party currently looking to make an offer for about 2200 sq ft of the building (its multiple office spaces within the 15,000 sq foot layout) which creates a lot more confidence in the deal from my end. We know there is potential and you make a good point, its easy to get cold feet.

Bjorn what other types of opportunities would you be considering if you were in my shoes? Always open to looking in different directions.

Appreciate the input, wishing you both all the best!

[Henry Clark]

Look on Loopnet for your town.  Find similar size and type of property.  Check out who the realtors are, how long they have been listed, $/sf, etc. 

Also look at making this a flex building.  Dividing into smaller 1,000 to 2,500’sqft.

[Bill Horton]

@Account Closed see if that broker can get you a submarket report from CoStar, along with his/her opinion. It may give you a good insight on the time to lease it up. It sure seems like office space is sitting on the market much longer right now. That is our experience currently with our small portfolio in Oregon. 

[Ronald Rohde]

You maybe pre-lease 10% and that gives you a lot more confidence? Is that lease covering your carry costs?

You don't even mention asset type of condition of the structure, so I'm going to say its not a wise investment. You are buying a dangerous asset with huge carry costs. What have you budgeted for TIs, commissions and hold costs? 

Even if you get it mostly leased, what is your exit cap? Refinance? 

[Account Closed]

Quote from @Ronald Rohde:

You maybe pre-lease 10% and that gives you a lot more confidence? Is that lease covering your carry costs?

You don't even mention asset type of condition of the structure, so I'm going to say its not a wise investment. You are buying a dangerous asset with huge carry costs. What have you budgeted for TIs, commissions and hold costs? 

Even if you get it mostly leased, what is your exit cap? Refinance? 

Lease of 10% of the building covers of the carry cost yes, asset is in good condition does need new roofing which we have received bids on coming in at approximately $20,000 dollar.

TI will be be dispersed amongst different months over the life of the lease once a tenant agrees to terms.

Exit cap rate will exceed 10% based on the most conservate of numbers.

Thoughts?

[Account Closed]

Quote from @Bill Horton:

@Account Closed see if that broker can get you a submarket report from CoStar, along with his/her opinion. It may give you a good insight on the time to lease it up. It sure seems like office space is sitting on the market much longer right now. That is our experience currently with our small portfolio in Oregon. 

 Hi Bill, yes working with Costar currently to get some more data scheduled meeting with a representative this upcoming Monday prior to close. I will ask for the submarket report. Thank you for the suggestions!

[Joel Owens]

When we buy commercial properties we reach out to about 3 different leasing companies to see what their vision would be for the property and compare that with current use, to highest and best use, to zoning allowed use.

There are many restrictions to check on.

1. Zoning restrictions

2. Current tenant lease restrictions

3. Deed restrictions

4. Co-tenant adjacent restrictions for commercial association.

We set up a 90 day initial review period post closing to see what interest level there is from developer buyers, end user buyer, leasing tenants  and quality of tenants inquiring.

Then we go from there.

You need to know the roof quality, A/C units, parking lot, and if any association current assessments or special assessments coming soon.

15,000 sq ft building typically 10 bucks a foot so 150,000 for roof about. Parking lot depending on size could be 25k to 100k to resurface. If they have to mill it down because too many black coats done already then could be hundreds of thousands. So you could spend 1/2 a million before even doing attorney costs, leasing commissions, interior tenant improvements buildout credits.

The question becomes WHAT tenant and quality do you get? If you get large national private credit well known or investment grade than exit cap rate could be much lower. If it's a weaker tenant the rate could be 300 to 400 basis points higher on exit. 

[Ronald Rohde]

Quote from @Account Closed:

Quote from @Ronald Rohde:

You maybe pre-lease 10% and that gives you a lot more confidence? Is that lease covering your carry costs?

You don't even mention asset type of condition of the structure, so I'm going to say its not a wise investment. You are buying a dangerous asset with huge carry costs. What have you budgeted for TIs, commissions and hold costs? 

Even if you get it mostly leased, what is your exit cap? Refinance? 

Lease of 10% of the building covers of the carry cost yes, asset is in good condition does need new roofing which we have received bids on coming in at approximately $20,000 dollar.

TI will be be dispersed amongst different months over the life of the lease once a tenant agrees to terms.

Exit cap rate will exceed 10% based on the most conservate of numbers.

Thoughts?

Ok then that does help move the needle, ifyou can get to 80% leased, it becomes a 50x return. $20k is going to be repairs, a guy and a bucket, not a new roof (like Joel mentioned $100k minimum) What type of roof is it? Flat or pitched? Multiple buildings?

Exit cap of 10% makes sense. You just need to have confidence that you will lease it up.

[Joel Owens]

Check if the roof has rocks. If the flat roof has lots of rocks to suck off then can add a few more cost per sq ft to the bid because of added time, labor, disposal.

[Kristi Kandel]

Quote from @Account Closed:

Thank you for the responses Michael and Bjorn. I have reached out to the broker and he has informed me he has a party currently looking to make an offer for about 2200 sq ft of the building (its multiple office spaces within the 15,000 sq foot layout) which creates a lot more confidence in the deal from my end. We know there is potential and you make a good point, its easy to get cold feet.

Bjorn what other types of opportunities would you be considering if you were in my shoes? Always open to looking in different directions.

Appreciate the input, wishing you both all the best!

@Account Closed I actually built the family dollar that is there years ago. I was inspired by the community leaders back then and how they were working together to help promote growth. I'd recommend talking to the city's economic development agency to see what businesses they are talking to about moving to the area as well as any local startup/entrepreneur companies that help new companies get started and expand. 

If the numbers work for you and your goals it's ok to feel a little scared but then to embrace that and dive in anyway!