Potential Pitfalls?

Question

Ran across what seems like a good deal on a commercial building in a small town.

Roughly 4000 sq' and needs alot of work, has actually been condemned by the city. 1st floor has a few business rental spots, needs work but not in too bad condition. Upstairs has apartments but needs to be gutted and redone. Roof has leaked for awhile and needs to be completely redone.

Nice looking building in a good location, shares exterior walls with a nice building on either side.

Wondering what sort of the problems I may overlook, worried about missing something important.

I have a decent amount of experience with remodeling and a little extra cash, probably enough to get it dry and the bottom rented, then start picking at the upstairs.

Going to call the city and ask them about it tomorrow, any advice on other things I need to check or think about before buying?

Jon Holdman · Answer

I'll agree, you may have to do some major work just to get started.  Commercial is different than working on a residence you own.   The building codes are different.  The inspections are MUCH more strict, since there are many more people at risk.  You would typically hire different contractors for commercial than for residential.

You may well run into the sort of upgrade issues Ingrid and Caleb mention where you will be required to bring the entire building to current codes.  That might require coming up with plans for the entire project and having those certified by an engineer. Then you may have to install the major systems all at the start.

The suggestion about contacting the city is the best one.  Call the building department, and tell them you want to discuss the building as 123 Main.  I really mean the actual address.  Don't beat around the bush and say "I'd like to do this sort of thing in this sort of building."  Say, "I'm considering buying 123 Main.  Its been condemed.  I want to put retail back in where it was and fix up the apartment upstairs."  What will it take to do that.  Be specific about what you what to do.  You want specific answers before they become your problem.  If you make it clear you're trying to understand the process and requirements, and you intend to follow them, you're likely to get a good response.  Its people who say "hey, I've already got a bunch of money sunk into this deal so you have to approve what I'm doing" that people get in trouble.  Inspectors could care less that you made a bad deal.  Get the real skinny on the specific property and its problems before they become your problems.

Scott Williams · Answer

Thanks Jon, actually thats exactly what I did earlier today and there is enough that needs to be done to keep me out of it.

On a project like that the inspector is very important, I really wanted his input specific to that building.

Time to continue the search, Thanks all.

Scott

Account Closed · Answer

I agree with Jon.  Be specific in the details, its what you leave out that will come back to bite you.

Scott Williams · Answer

Thanks for the replies. I will follow some of your suggestions, the condemnation is a big thing it opens up a large can of worms I know.

What difference would what I am doing with the rest of the building make to a retail tenant, as long as their space is nice and they are not affected by it? They will not be using the same entrances, bathrooms, etc. Not even sure they would be able to hear anything.

I am undercapitalized and thats a big concern..seems like if I have the cash to get the exterior and mechanicals finished it will be alright, I don't need the rents to live and have a decent income. Still would need to get the easy to fix and rent spots done asap.

Thanks, Scott

Account Closed · Answer

This probably doesn't apply, but are there any applicable federal codes (i.e. FEMA) that apply to this building?  In places like where I am Hilo, HI, certain near ocean parcels are affected by FEMA which affects how much cash you can spend on repairs until you have to actually have to upgrade to current code.  For older buildings this becomes something that is a deal killer as you will not be able to lease out your commercial space for what it takes to bring up to code.

Ingrid Nagy · Answer

I have a similar building that many years ago suffered from a fire loss.  We did the work ourselves as owner.  We did however have to retain a bond naming the City.  Although we had loss of rents coverage and sufficient funds to cover the repairs to the structure we ended up doing a lot of things to the building that were not planned such as new fire escape construction and installation of a sprinkler system.  The rules all change after a structure suffers damages or goes through condemnation.

Jim Wineinger · Answer

Again I will repeat what has been said.

Speak to the city, specifically the building inspector. A lot of cities will not allow you to bring the unit(s) up to code. Since it has been condemned they often will require the work be done by a liscensed and bonded person or company. If the work is done by you and you are not licensed and bonded they can reject to work that was done, including making you rip it out and have it done by licensed people especially if it was done in the wrong order permit wise.

There are too many variables not to have this done correctly. Making a "friend" of the building inspector will help you immensly as they will guide you toward the correct way to do things.

Jeff S. · Answer

My first impression is that you sound terribly undercapitalized.  Would you like to be the 1st floor tenant while renovations are being performed upstairs, by a landlord that can only â€pickâ€ at it because he doesnâ€™t have the cash to do it quickly?

First of course, speak to the city and ask them what they will require for you to bring it up to code.  If its been condemned, youâ€™re likely looking a complete gut job than a light rehab.  If itâ€™s leaking into your unit, it could be leaking into your neighbors.  I would talk to them as well to determine your potential liability.  Considering its history, I would also call an insurance company to see if they consider the property insurable.

Obviously, you also have to run the numbers and see if it meets your investment strategy.  I would not buy a property solely because I was good a rehabbing.  Whatâ€™s the local economy like as well as rental prospects?  In some areas itâ€™s easier to rent apartments than retail, which is the opposite order you want to renovate.   Can you handle some vacancies for a while?  Good luck.

Jeff

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