Industrial Property w/ Dilapated Building BUT... a $$$ Billboard

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Industrial Property w/ Dilapated Building BUT... a $$$ Billboard

Matt Dorsten
Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes

I wanted to get some input on a piece of property that keeps coming across my desk...

This property (about 1/4 acre) is in Denver and has about 5,500SF of building on it, about 4,000SF are old row-homes and 1,500SF is a 2 story building that looks like and old office building.  The buildings are in terrible condition and I don't know if they are even worth remodeling, maybe demo'ing is the best option.  I've walked the property but the windows and doors are boarded up. The zoning is already in place for industrial.  BUT, this property has frontage on a heavily traveled arterial road and so the billboard on the property is the real income potential (even though the billboard is under-marketed due to lazy ownership).

Expense:

  • The owner will sell for $425,000-$450,000.
  • IF the building's could be salvaged, it's going to be about a $250,000-$400,000 remodel (this includes paving and grading for a parking lot).  
  • Total (worse case scenario): $850,000

Income:

  • The billboard could lease today for about $2,500/month
  • If the buildings are salvageable, net rents could be in the $8-$10/SF range (let's say $9/SF average for the 5,500SF) or $4,125/month.
  • Total: $79,500/year or 9.35 CAP rate (nice!)

This would definitely be a very involved project.  Should I put this pipe dream to rest or do you think there might be some real potential here?  Am I trying to polish a turd?

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Shane H.
Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes
10y

@Matt Dorsten

Not to stir the pot here, but why would you not build in vacancy into the pro forma?  I'd think it would be wise to do so.  Have a best case, worst case and most realistic case case pro formas -- 

If you cant make a little money on the worst case or break even then I'd walk. 

But that's me and I tend to think a little conservative as I would in poker until my chip stack is larger and then I'd be willing to take the occasional risky move if the potential payoff is big enough.

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @Matt Dorsten Interesting project, I have considered something similar in the past.

    Some questions:

    - What do you estimate as the raw land value if it were scraped?

    - What would the highest and best use be?

    - Does current zoning allow this highest and best use, or could it be changed easily?

    If the answers to the above are favorable, the project looks much more attractive. If not it could still be a yes, just more along the lines of letting the property pay for itself while you wait for the land value to appreciate.

    1Reply
  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Nick L.

    Raw Land Value would likely be in the $20/SF range.

    Highest and best use for this area is currently industrial.  This would be prime location for a small trades business (plumbing, HVAC, electrical) or a residential remodel type use (cabinets, granite, flooring) because of the central location and easy access from major thoroughfares and currently industrial zoning designation.

    Current zoning is Industrial with Industrial Mixed-Use across the street.  The Mixed-Use would allow for a residential component but, the property/area is not in any condition to go residential.  But, you could probably rezone the property while reworking the site with any zoning conformity issues.  A rezone may get you to $25/SF for the land.

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    OK so scraping won't be viable. The cap is nice.... IF you have 100% occupancy and get all the rents you want at absolute net with no landlord TIs. I don't know the specifics of this property but I definitely wouldn't count on that in my market. I'm going to guess that by the time you figure in your real expenses you will be at about a 6 or 7 cap. 

    That might be worth it if the property is in the path of progress and likely to become more valuable. If not, you could probably get a better return elsewhere.

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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Nick L., thanks. I think the remodel plan is simple flex space with minimal office (1 lobby, 1 private) for a tradesman, so a TI package should be minimal ($2/SF which is nothing more than paint and flooring for tenant turnover). Operating at 100% occupancy and you'll have good returns but, that's always the story in commercial real estate. What's going to keep the CAP rate up on this property is that billboard- tail wagging the dog? Perhaps.

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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    Oh man, just realized how bad I butchered dilapidated! 

    0Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @Matt Dorsten Yeah I hear you on the billboard but it hardly seems worth the expense and hassle of running a breakeven industrial building to get the billboard income. Are cap rates in Denver so compressed that this looks like a killer deal? :) Tail wagging the dog, as you say.

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I don't think this is a turd at all and I can see why you're intrigued. 

    I would get permission from the owner to enter the buildings (assuming they are safe to do so) and take a look at the condition to see if they can be saved.  I'd be interested in tagging along too (this project is out of my price range - I am not competition for you).

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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Nick L. yes, an 8+% CAP rate in Denver is not heard of in the market right now, those kind-of returns don't make it to the market. That's how tight our market is right now.

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  • Douglas Dowell
    Denver, CO · Member since 2012 · 350 posts · 175 votes
    10y

    What are you most important objectives?  What are your time constraints?

    I think you are in a position to add unique skill sets to more efficiently re-zone properties given your background.  

    This particularly a small deal but if you can get some owner carry to compensate for the condition it might make some sense.    

    0Reply
  • Jimmy Klein
    Investor · Houston, TX · Member since 2013 · 195 posts · 102 votes
    10y

    Your analysis assumes no vacancy and your best case scenario is 9 cap for all the work and effort you would do to renovate the buildings. If they are as bad as you say they are then you are dealing with more than just renovation, who knows what the underlying costs are such as roof, piping, etc. You might have not factored this in, but if something breaks your budget is going up. Then don't forget about any mold which might be around. 

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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Douglas Dowell- most important objectives- (1) a successful redevelopment that (2) stays within the budget while (3) achieving 100% occupancy and (4) an 8+% CAP rate.

    @Jimmy Klein- I'm not sure I understand your first comment regarding assuming no vacancy.  In putting together a rough pro forma for the property, why would I assume vacancy?  Sure vacancy happens but, I'm not going to approach a project that I don't believe can attain 100% occupancy.

    0Reply
  • Shane H.
    Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes
    10y

    @Matt Dorsten

    Not to stir the pot here, but why would you not build in vacancy into the pro forma?  I'd think it would be wise to do so.  Have a best case, worst case and most realistic case case pro formas -- 

    If you cant make a little money on the worst case or break even then I'd walk. 

    But that's me and I tend to think a little conservative as I would in poker until my chip stack is larger and then I'd be willing to take the occasional risky move if the potential payoff is big enough.

    2Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    I'm with @Shane H. on this one. It's just not realistic to expect an old industrial building to get to 100% occupancy. If you can't at least get by on 75% (maybe lower) you could end up with a big loss. There's always going to be someone with a similar building and lower cost basis who can offer cheaper rents than you can.

    To add to @Jimmy Klein's good point about reno costs, one of the big problems with this type of contruction work is messing with grandfathered in systems. For example I looked at buying a very old warehouse type building for partial redevelopment. The contractor commented that while the elevators and sprinklers are grandfathered in, if I had to extend them in any way the grandfathering would be lost and I would have to replace them all with new code-compliant systems.

    If you got a new tenant that was perfect but required additional fire suppression, would you want to replace the whole system for them or would you let the space go vacant?

    1Reply
  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Shane H. & @Nick L.- let me back up a second... what makes the deal attractive in the first place is the billboard with $2,500/month income potential. On a $425,000 sale that's a 7% CAP, not bad (not amazing either).

    Now for the buildings- I could scrape the property ($50,000???), put up a 2,000 steel building ($160,000 or $80/SF), paving and grading at $50,000 (total guesstimate) and lease that for $12/SF net- 9.2% CAP, looking good! Of course, there is the renovation option that will result in more square footage but for a higher reno cost.

    So, with the billboard ($425,000) bringing in $2500/month and the steel building ($260,000) bringing in $2,000/month net- cumulative CAP rate of 7.9%. If I go VACANT (there, I said it) CAP rate drops to 4.4%.

    Of course, to reno the building and have multiple tenants would provide some protection so I think worse case scenario is a 4.4% CAP.


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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Nick L. a fire suppression is a deal killer.

    0Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @Matt Dorsten OK I like this version of the plan more. For me, the only missing piece is validation of your numbers. If you can pre-lease the building, or at a minimum get several good comps showing that leasing will be easy, financing will be easy too.

    I like that this version has three separate plausible income streams:

    - Billboard

    - Building

    - Land play (I assume, since Denver is hot)

    Maybe a fourth from upping the zoning too, as @Douglas Dowell said earlier.

    You might consider running a Phase 1 environmental as part of your due diligence. Even though the current uses are above ground and non-residential, you never know what the future will bring.

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    Would you buy a SFH for $ 100,000 with rent of $ 700?

    I wouldn't.

    0Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @Michaela G. Sure I would - if I could reposition it to hit $1,000 next year with a growing land value. In fact I would take that over a 2% rule property if I could conservatively estimate a higher return over 5 years.

    0Reply
  • Jimmy Klein
    Investor · Houston, TX · Member since 2013 · 195 posts · 102 votes
    10y

    @Matt Dorsten

    I have worked with large development firms that assume some sort of vacancy even in NYC. I think its kind of ridiculous not to do so. As for the billboard, some agreements make the landlord cover upfront costs such as new billboard banners or more importantly you might even have to pay leasing commission to a broker to help you get a company interested. Same thing applies for you 2000 sqft steel building. If you can build steel framed buildings for $80 sqft, please call me now. I want you to build for me. Don't forget tenant improvements and leasing commissions as well. Ultimately you know this market and property better than anyone here. I haven't seen it. I know nothing about it, but you got to remember there are a lot more variables in play when you are talking about demoing and rebuilding. 

    1Reply
  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    @Jimmy Klein, thanks for the input!  After all the comments provided (thanks @Nick L. & @Shane H.)  I will factor more vacancy in the pro forma.  

    Jimmy, can you tell me what you would expect to pay for a steel building? 

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    One thing I would look at is , if the location would fit for a marijuana dispensary. 

    I had a friend, who researched it in Denver some years ago and it's really difficult for new dispensaries to find a location that has the right distance to the next dispensary and has to be in an industrial area and right distance to this and to that. 

    Those dispensaries will pay a very high price, if the location fits the criteria

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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y
    Originally posted by @Michaela G.:

    One thing I would look at is , if the location would fit for a marijuana dispensary. 

    I had a friend, who researched it in Denver some years ago and it's really difficult for new dispensaries to find a location that has the right distance to the next dispensary and has to be in an industrial area and right distance to this and to that. 

    Those dispensaries will pay a very high price, if the location fits the criteria

    Good thought. The zoning allows for it but, I'm not sure about the other separation requirements. Considering the size of the building, the marijuana tenant that this property is likely to attract would be Marijuana Infused Products (MIP's), still, they'll pay a premium for the space. However, MJ eliminates the ability for any institutional lending on the property- whether it's a sale or refi.

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  • Matt Dorsten
    OP
    Commercial Real Estate Broker · Denver, CO · Member since 2015 · 38 posts · 8 votes
    10y

    After looking at the property with my boss and talking numbers, the opinion was that the sale price of $425,000 is just too much.  I have a tough UNmotivated seller but, I'm going to make a lower offer ($250,000-$300,000) and see how that's received.  It may open up discussion or may cause the door to get slammed in my face.

    Now, I'd be interested to hear about other people's experience in turning an UNmotivated seller into, well, a seller.

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    10y

    @Matt Dorsten I was told a few years ago that when the legislation was signed limiting the spacing and location of MJ facilities that there were no remaining sites in Denver the meet the law. I would scratch that off your list unless you do some detailed analysis of the law and have it verified with someone knowledgeable in the industry. IMO, there are enough people looking for that product that if it was viable, it would be gone.

    Unmotivated seller. Move on and sniff out some motivated sellers. Make your offer, if it doesn't work move on and then follow up every month or so. Never know when their pain will change.

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