BiggerPockets

Hi all,

I am currently looking at a commercial property in NH. Three buildings which include 22 apartments, 9 retail storefronts and a vacant theatre.

Annual Gross income is $252,000
Annual Operating Expenses are $75,000
Assume a 5% vacancy (-$12,600)
Leaves a Net Operating Income of $163,000
Asking price is $2,500,000

All units are rented except the theatre, it needs work and is what I ultimately want to renovate and reopen. For now, I'd be happy if the rest of the property paid for itself.

What kind of financing would be possible on a property like this? Given the numbers above, how much could be financed and remain cash positive?

Any help or advice on this deal would be appreciated!
Thanks,
Joe

Hi Jon,

Thanks for the response. Leases are not NNN. Expenses are as stated. I've got a max of 10% to put down and was hoping to not exceed 2.3 mil on the property.

Is a commercial 30 year possible? I haven't researched the finance angle much at all, just beginning the process now. Any help in this regard would be appreciated.

Thanks,
Joe

Joe,
Commercial properties are usually valued based on their income. Commonly, this is based on a " cap rate" or capitalization rate:

Cap rate = annual NOI / purchase price

For yours, cap rate = 6.6% = $163,000/$2,500,000

That tells you what return your money would get if you paid case. That's equivalent to thinking about putting money into bank CD's.

From what I've seen, that's a pretty common cap rate. Maybe on the lower end, but not out of line with lots of other properties listed on places like loopnet.

Other ways to determine values are the comparable method (like is used for SFRs) and the replacement cost method. The income approach seems most common for commercial properties.

Now, does this make it a good deal? Personally, I think a 6.5% return is too low for this sort of investment. You could get 5% at a bank with zero risk. So, why would you sign up for all the hassle and risk for an extra 1.5%.

Of course, its not that simple. You can leverage your investment, and get a much higher cash-on-cash return, if the numbers work right.

For one thing, this is just a snapshot of the existing situation. Maybe the rents are low and can be raised. Maybe there is reason to believe there is significant future appreciation. On the other hand, maybe there is a major expense coming up or there is a lot of deferred maintenance.

I am not very familiar with retail expenses. Expenses on the apartments, though, will run you 45-50% of the rent, including vacancy allowance. The numbers you quote are 35% of the total rents ($87.6K / $252K). You might want to see details for each part of the deal. Ask for tax returns for the past several years. If expenses truly have been this low, I'd be concerned with deferred maintenance. At best, I think those expenses are optimistic.

I have heard recently its possible to get a 90% commercial loan. Getting a 90% 30 year loan at a decent rate may be a challenge. If you get the property at $2.3 mil, and get a 90%, 30 year loan at 8%, your annual payment is still $182,000. That means you're in the hole for $230,000 (down payment), plus closing costs (non-trivial on a commercial property) and losing $1500/month.

If you intend to open a single screen movie theater, you'll have to play to a niche audience. Multiplexes will take most of the business. Here in Denver, there are exactly two single screen theaters for the whole city. They both play offbeat films. Movie theaters are a very low margin and cut-throat business. If you mean live performances, its probably even worse. Most performance theaters require significant private and public contributions to stay afloat.

Jon

Joe,
I sort of sensed from what you said this might be a live theater, and you really wanted to see it open. Sounds like you have good knowledge of the business, so maybe you can put that to work to make it a success. Don't let me be a dream killer. Conversly, don't let your dream drag you into financial ruin.

Real estate is a numbers business. It sounds like you are seeing deferred maintenance. That lets the current owner make the NOI look better, but creates a lurking nightmare for the next owner. That said, the new roof is good thing. Plan realistically for the needed maintenance and for ongoing expenses, and you might get this to work.

How desparate is the seller? If they are really wanting to move on, you might have some room to negotiate. Ask about seller financing, at least for some chunk. Maybe good terms, like deferred payments for a year or two. I think I saw Scott (aka EZLoans) mention in a posting recently he had lenders would would do a 95% CLTV structured as 75%/20% owner carry/5% down. Might try to look into any economic development funding that might improve the deal, too. See if there is an existing loan that you could assume. Commercial loans are often assumable. Assuming the existing loan and doing an owner carry for the remainder might be an approach. A master lease with an option to purchase might be another approach. Just lock in the purchase price so you don't have to pay for the improvements you make.

If I look at the numbers at $1.5M, 45% expenses, 90% loan at 8% with 30 year amortization, you should be cash flow positive to the tune of $1700/month. You'd have to put $150K plus closing costs and immediate improvements into the deal. At 100% financing (i.e., paying yourself the same return on your down payment as you're paying on the loan), its right at break even. I'd say that the absolute max you should pay, and it would be better to be down toward $1.2M.

Another caveat is that commercial loans often have a balloon payment or a time when the interest rate adjusts. A loan with terms like " 30 year amortization, due in five" means the payment will be as if its a 30 year loan, but the outstanding balance will be due after five. Rates will vary based on the time until its due or the time the rate is fixed.

Jon

Hi Joe,

Where was this located?

Hi Joe.......not interested myself. Just curious where stuff is happening in the state. I am more interested in multifams...but I am just getting started.

On a side note, have you attended the NHREIA meetings in Bedford?

Right on. I just passed through Laconia on Sunday. Would love to see an independent theatre in this part of the state. Wilton's Town Hall theatre seemed to do expecially well when we lived down in that part of the state.

Good luck!

Excellent! Maybe it will work, or the owner will come up with a creative way to make it work (e.g., you pay $100 a month until you know where freezes over.) Let us know.

Jon

Does the annual gross income include the projected theatre income or is the actual income? If it is projected, then the sales price is way off.
How much more income would the theatre add if rented or you were operating it?

Also, who manages the apartments? If it was the owner, then there is a good chance that they left out that expense. Make sure to include this cost in your expenses. Even if you plan to manage them yourself the lender will include the expense in their NOI calculation.

When negotiating with the seller, you may want to negotiate on terms as well as price. If you can get seller financing you could keep more in your pocket for the rehab.

Dominic Enea
Commercial Agent

From all the information you have provided, I would say that getting in for 2M or under would be a good deal. That would be more than an 8 CAP with upside.

I would try to structure it this way.
70% 1st 5yr Fixed/30yr ammortization $1,400,000 @ 8% = $10,300
15% 2nd 5yr Balloon $400,000 @ 10% (5+5)= $1750
10% Down $200,000

DCR of 1.13 is on the riskier side, but if your fairly sure you can get the theatre going it would jump to a very healthy 1.47.

You would have a cash flow of over $1500 per month with a potential to earn over $5000/month.

The seller get 1.6M now for a property that is not selling, but still gets fair value.

If you can get a lower price, all the better.

Dominic Enea
Commercial Agent