I am in the process of trying to acquire a mixed-use building in my area (that is mostly in disrepair) via a master lease option. To make a long story short, the person who acquires or purchases this building will have the opportunity to utilize approximately 1 million dollars in grant money that was appropriated to help revitalize our downtown area. While the building is currently negatively cash flowing (about -$500/month according to the broker I'm working with), the owner owns this property free and clear with no encumbrances. If I was able to negotiate a deal with the owners (whom I actually know quite well), there are at least two caveats in play: (1) The grant expires if not used by the end of 2015, so I will have to look to get an extension (my contact with the city informed me they can request an extension, but only after there is a new owner in place) and (2) The repairs must be completed upfront, so I will have to obtain financing to fund the project (the estimated renovation budget is roughly 1.1 million dollars).
As part of my offer to the seller, I plan on working in a 90-day due diligence period for me, where if I am unsuccessful at securing the funds within this time period, I can walk away from the deal and they can continue to market this building to other buyers from that point forward. Does anyone have any advice that will help me with the acquisition or financing phase of this potential deal? Any thoughts or opinions will be greatly appreciated!
I'm actually working through a similar project right now. We've just submitted the numbers to the bank and will be discussing everything shortly. We received 2 cost estimates for the rehab along with an initial code analysis to look at the possible elevator and fire suppression requirements. I'll post what comes out of the discussion.
@Michael Talerico I just finished putting together the numbers for the bank. We've been talking about this project for about two years so we both wanted to see if/how it was going to work. After submitting them, I called him about a day later. We talked a little and then I told him it wasn't a good deal. Based on current market caps and rental rates, we'd be putting in $2M (including acquisition) into a property that would be worth $2M. That's for the most likely rehab cost. There's a chance of a cost over run of up to $200k once we open up the walls.
We're looking for state and federal incentives to bridge the gap. At this point, we're going to be patient and not purchase it without them. It may be another year until we can get those lines up.
@Greg V Thanks for the follow up on your project! Since my initial post, I've learned much more about the property I'm looking at and I've actually gone ahead with submitting an acquisition proposal. The great thing about my opportunity is that there is an aggressive revitalization effort going on in my market, which is really starting to gain traction due to a significant surge in both industry and entertainment over the last few years. Additionally, over the last 4-5 years, local developers have had incredible success developing/renovating mixed-use buildings, so now there are actual numbers aspiring investors can use to market their business plans more effectively to potential lenders, rather than having to speculate. So in a nutshell, these recent developments have really helped loosen up lending standards for local banks here in my area, so I'm much more confident that I can make a run at getting this project financed. Also, as an FYI, based upon my conservative valuation, post-renovation, I'm looking at a building worth in the neighborhood of 1.5-1.6 million.
Sounds great. Keep us posted on the development. I'd like to hear of any unexpected issues that come up to help in our planning. Thanks!
Hope all is well sir.. I am not sure why I am not able to respond to your marketplace post. Could you email me more information on your 5 unit property and where it is in Utica? [email protected]
@Steven Lanahan Steven- I'm not sure why I never saw your post several months back regarding my 5-unit property I had for sale, but I'm just realizing now scrolling through some of my old posts here on BiggerPockets. At any rate, my sincere apologies! I actually still have the property, so if you were still interested in knowing anything about it, I'd be happy to send you the info. And to avoid any correspondence/communication issues this time around, please email me directly at the email listed on my profile profile page. Thanks Steven.
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