Creative commercial financing?

Question

What would you do in this situation:

Business: Manufacturing

Commercial building valued at 2mil

550k left on mortgage

800k Line of credit (650k balance)

Bank is demanding line of credit balance to be lower than 50%

Business isn't great, we were unable to show any real profits to satisfy the bank.  I have pitched the idea of just refinancing in the amount of the first and second mortgage to at least get the bank off our backs and lower the monthly payment. But I would like to come up with a strategy to help the business grow and stay afloat. It is a family business, and although I don't plan on staying much longer, I would like to offer my help in the Real Estate end of things.

My entrepreneur mind is thinking me and my brother buy the building to give the company the most equity in the property, since it would never sell for 2mil. We take out a construction loan and renovate the first floor into apartments while continuing the manufacturing on the other two floors. It would be interest only payments for 12 months and we would have the benefit of fixing the building up.

Does anybody else have any thoughts? Keep in mind this is a 160k sqft building.

Michael Wagner · Answer

No, you will need a GC for that.  And you'll need to provide those companies with drawings.  They will design a layout with you and provide/install the kit.

Jaysen Medhurst · Answer

Are you working with a commercial leasing agent, @Brian Ellis?

Joseph Cacciapaglia · Answer

One more thought. Would the first floor work for self storage? I've worked on a deal where part of the old industrial space was cut up for that purpose. If it's already climate controlled space, building out the units isn't that difficult, provided you have loading docs, and appropriate parking and access. You could do that yourself, if you can raise the capital, or you could lease it to an operator.

Jaysen Medhurst · Answer

Highly unlikely that your local zoning is going to allow apartments to be built on the bottom floor of a manufacturing building, @Brian Ellis. Beyond that the chances that this building would then be both suitable and up-to-code for residential use is a very, very long shot.

If your business is only using 2 of 3 floors, can the other floor be rented out, either in part or in whole?

Refi is definitely worth exploring, especially with rates where they are.

Joseph Cacciapaglia · Answer

You said the value is $2MM, but it wouldn't sell for that amount. How does that work? What do you think the value is on the open market? That's the first thing you need to be sure of, before you can get too creative. Even if you're willing to pay $2MM, if that's not an arm's length transaction, you may not get financing for that purchase. What type of manufacturing is going on in the building? Is it something that would bother residential tenants below? Have you explored just leasing out the first floor as commercial space for additional income? What's the highest and best use of the building? Would it make more sense as a complete apartment conversion, and then the business could rent elsewhere? Have you considered creating a "maker space" or even coworking space on the first floor? I've seen some manufacturing companies do this with their unused space with varying degrees of success.

Brian Ellis · Answer

Awesome! Thank you! Yes it is around 40000 sqft per floor

were those companies willing to help with preparing the envelope?

Michael Wagner · Answer

Take a look at Janus or Trachte.  We are mid conversion on a 45,000 square foot conversion.  The real challenge is getting the building ready for the "conversion kit"....once the envelope is ready, the kits go in pretty quickly and relatively affordable (as low as $7 per rentable square foot assuming you are up over 20,000 square feet).

Brian Ellis · Answer

Not a bad idea. It is climate controlled, with plenty of parking available. Could you point in the the right direction to find out what exactly is involved in building them out?

Appreciate the suggestions!

Brian Ellis · Answer

We are currently trying to find tenants to rent out the first floor. But that has been tough finding a renter to commit.

Brian Ellis · Answer

@Joseph Cacciapaglia I responded to the wrong quote, please see above.

Creative commercial financing?

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