Phase 1 ESA for Commercial Property? Help

2 Replies

First off my name is Mike and I am new to the BP forums, but have been a long time Podcast listener. Tons of great information on here!

I am working on my first deal and it is a commercial property. It cash flows well and has a great cash on cash return. Currently has a tenant that is willing to sign a 3 year lease with me upon purchasing the property. I have a signed P&S and have been working with a lender and everything has been moving along smoothly up until this point. I am purchasing a commercial condo unit which is a double unit in a 10 unit building. The bank wants to do a Phase 1 ESA and is asking my to pay for the $2900 to perform it up front. I have done as much research as possible talking to the seller, other condo owners, association president etc. but have not been able to get much information as far as what to expect. I am fairly confident based on my research of the property that it should not have any major issues as most of the businesses in the condo have been storage or office type use. I have also ready many stories on the forums here where the lender Phase 1 is non conclusive and the lender pushes for a Phase 2 which ends up costing much more and opening a can of worms? Any advice is appreciated! I really don't want to spend $2900 just to be told I need to do a Phase 2.

Not sure what happened to your deal 10 months ago, I only want to tell you not to invest in office condo. I sold our office building (not condo) in May 2021 and we had a good capital gain. I sold our office condo Nov 2020 and we had a loss. My husband used both places as his office. We also rented out part of the office building. The commercial broker who sold our office building told me office condo is really not a good investment. I hope you will steer clear of office condo investment. If you have a business and need a place, that's a different story.

Also not sure what you define as great cash on cash return. I have a friend who used to invest in commercial properties only (office, retail etc) and he told me these properties don't appreciate much (maybe nominal appreciation but not real appreciation) so he requires good CoC return. I asked him to look at a medical building in Orlando that's giving 6+% CoC NNN and he said that's not good enough. He requires double digit CoC, which is very difficult to find these days.

Single-tenant buildings/condos are a bit riskier than people think.  We have a couple of them and some lenders do not want to touch them.  If you are getting into this space, you need a personal guarantee.  Also given covid, you will want to confirm that their business remained viable during it.  Regarding cap rates and coc, cap rates are low across the country right now... there are a number of good shops putting out research - MM is an example https://www.marcusmillichap.co... where you can get specifics.

For you to get above 10% on COC, you will likely have to find an off-market deal, buy in 2nd/3rd tier markets, or a value-add deal right now. They do exist, but it takes work to get there. Good Luck. Chris Hays, Cerebro Capital LLC