Mixed Use Deal in Los Angles County-Long Beach Retail/Apt ValueAd

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Mixed Use Deal in Los Angles County-Long Beach Retail/Apt ValueAd

Will F.
Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes

Hi.

I'm currently looking at several apartment buildings in the Long Beach area. I wasn't intending on it, but I found a mixed use (retail ground level with apartments on top) that I'm interested in. It is a value-ad property and has a lot of issues (empty retail and under-performing apt income). Properties in the area sell for significantly higher that are fully rented. This could perhaps be valued at $200-300k higher if units are rehabbed and fully rented with solid retail tenants. It also requires some roof, siding and other deferred repairs.

What do most of you investors think of retail/ mixed uses in general?

This is in a fairly hot drag with a lot of little coffee shops, hip vintage stores, and some retail....but it's mainly a residential area.

I've already invested in apartments and done some commercial leasing - of medical and small office space.

Here's the property:

$1.1 M purchase price

9 units total

x4 0/1 studios (low rents for area)

x1 1/1 (empty needs to be gutted and rehabbed)

x4 small Retail spaces 500 SF each - (street frontage, charming area, mainly residential but on a street with some retail, theres a significant amounts of foot and auto traffic)

$600k down with $500k loan (this is due to the property being mixed use and the empty spaces) for $1.1M total in.

GSI is currently 60k but could potentially be 100-110k

I think it could be appraised for $1.3-1.4 after it's been renovated, rents raised, and retail fully rented with long term tenants.

The problem is 3/4 of the retail spaces are empty and one studio needs to be gutted and rehabbed. I have experience with flipping and rehabing houses so it seems to be a value-ad project I can take on.

I'm just wondering about general advice for moving into retail space. Has anyone else done a similar value-ad deal like this in an already hip up-and-coming neighborhood?

I kind of know apartments are so much easier--as this is what I do mainly small apartment long term investing, but I'm just trying to do something new with some value adding.

It has been hard analyzing this deal as there's so much to put into it in order for it to work.  I'm really banking on this area improving as well as this area has really sprung up in the past several years and the city also is encouraging business growth of this area.

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Christopher Telles
Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
10y

Don't count your chickens before they hatch.

No really, hopefully your underwriting isn't including a 'value add' for gentrification of the neighborhood in this property. Transforming areas take decades, not years. 

Many today would consider South Park and the Staples Center to be a good investment area, but if you would have been an investor in that marketplace in the early 2000's you'd know if was a tough place to get tenants to rent, the homeless and transients didn't help. Fast forward ten year and not to much had changed, except the Staples Center was an island development. The came residential towers, then restaurants, then retail, then more development.

Same goes with 2nd Street in Long Beach. Early 1990's that street was silent. Busy on weekends with local bars and restaurants, but not the destination place it is today. That was also two decades in the making. Don't 'add' a value that isn't there when making an investment. Cashflow (proforma cashflow to guide your underwriting in a value add deal) should be the only measuring stick for this deal.

To your potential investment, underwrite the deal like a typical value add deal, if you haven't already, and then ensure you can improve the building(s) on budget and can raise rents to market.

As for mixed use, their desirable by many. Atypical apartment investors may shy away because they don't understand the commercial component, but there are many yield seeking investors who will buy a well maintained high yielding mixed use investment.

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  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
    10y

    Don't count your chickens before they hatch.

    No really, hopefully your underwriting isn't including a 'value add' for gentrification of the neighborhood in this property. Transforming areas take decades, not years. 

    Many today would consider South Park and the Staples Center to be a good investment area, but if you would have been an investor in that marketplace in the early 2000's you'd know if was a tough place to get tenants to rent, the homeless and transients didn't help. Fast forward ten year and not to much had changed, except the Staples Center was an island development. The came residential towers, then restaurants, then retail, then more development.

    Same goes with 2nd Street in Long Beach. Early 1990's that street was silent. Busy on weekends with local bars and restaurants, but not the destination place it is today. That was also two decades in the making. Don't 'add' a value that isn't there when making an investment. Cashflow (proforma cashflow to guide your underwriting in a value add deal) should be the only measuring stick for this deal.

    To your potential investment, underwrite the deal like a typical value add deal, if you haven't already, and then ensure you can improve the building(s) on budget and can raise rents to market.

    As for mixed use, their desirable by many. Atypical apartment investors may shy away because they don't understand the commercial component, but there are many yield seeking investors who will buy a well maintained high yielding mixed use investment.

    2Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Natve Calif, have lived in L.B.  What street are you considering?  what's the cross street?

    0Reply
  • Will F.
    OP
    Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes
    10y
    Originally posted by @Christopher Telles:

    Don't count your chickens before they hatch.

    No really, hopefully your underwriting isn't including a 'value add' for gentrification of the neighborhood in this property. Transforming areas take decades, not years. 

    Many today would consider South Park and the Staples Center to be a good investment area, but if you would have been an investor in that marketplace in the early 2000's you'd know if was a tough place to get tenants to rent, the homeless and transients didn't help. Fast forward ten year and not to much had changed, except the Staples Center was an island development. The came residential towers, then restaurants, then retail, then more development.

    Same goes with 2nd Street in Long Beach. Early 1990's that street was silent. Busy on weekends with local bars and restaurants, but not the destination place it is today. That was also two decades in the making. Don't 'add' a value that isn't there when making an investment. Cashflow (proforma cashflow to guide your underwriting in a value add deal) should be the only measuring stick for this deal.

    To your potential investment, underwrite the deal like a typical value add deal, if you haven't already, and then ensure you can improve the building(s) on budget and can raise rents to market.

    As for mixed use, their desirable by many. Atypical apartment investors may shy away because they don't understand the commercial component, but there are many yield seeking investors who will buy a well maintained high yielding mixed use investment.

     Thanks Christopher.  No my value ad isn't  relying on the gentrification of the neighborhood. The wave has actually been missed as this area is already pretty hot. I might be catching the tale end of the wave before it improves a bit more.  This is definitely not the very prime center of commerce, but is in a pocket a block away...which is why I'm not offering maximum price. 

    There's definitely value to be added and tenancies to be filled.  A lot of expenses and it's been difficult to finance, but I am able to luckily.

    It has a current Cap of 3.55 (due to vacancies and low apartment rents) and a potential Cap of 5.9... but this could be after a lot of GRIND and throwing a significant amount of money improving it.  

    Retail will be new to me, besides what I've read or learned.  I think I can do it as I'm relentless when I improve/manage a property even though most of my experience has been with rehabing houses. I've also owned/managed/rehabbed small multi fams for many years. 

    1Reply
  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
    10y

    You mentioned that you found the deal by accident of sorts so I'm going to assume you also invest in MF as per your other comments.

    You don't really say what the percentage breakdown is of the physical space e.g. MF Vs Retail, but I would like to add a comment for whatever value you might receive from it.

    A 5.9% cap for what you've described seems awfully skinny. CRE retail and or mixed use "value add" deals tend to project a cap rate 200 to 500 basis points higher. You're putting a lot of downstroke into buying a problem property, of course one that can be solved, but you should be compensated well for that effort.

    My suggestion would be you revisit the deal. If MF is the primary value driver then your cap rate projection should be market rate cap + a premium for the value add + a market cap for the retail + a value add component for the retail value add = better than a sub six cap.

    Just given your description of the value add components and the re-tenanting required to get to a market value I personally wouldn't touch it under a projected 9 to 10%, if I really really liked it, and most likely pushing into an IRR into the mid teens. That's not me being greedy, that's me wanting to be compensated for time, effort, and most importantly risk.

    All the best!

    2Reply
  • Will F.
    OP
    Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes
    10y
    Originally posted by @Christopher Telles:

    You mentioned that you found the deal by accident of sorts so I'm going to assume you also invest in MF as per your other comments.

    You don't really say what the percentage breakdown is of the physical space e.g. MF Vs Retail, but I would like to add a comment for whatever value you might receive from it.

    A 5.9% cap for what you've described seems awfully skinny. CRE retail and or mixed use "value add" deals tend to project a cap rate 200 to 500 basis points higher. You're putting a lot of downstroke into buying a problem property, of course one that can be solved, but you should be compensated well for that effort.

    My suggestion would be you revisit the deal. If MF is the primary value driver then your cap rate projection should be market rate cap + a premium for the value add + a market cap for the retail + a value add component for the retail value add = better than a sub six cap.

    Just given your description of the value add components and the re-tenanting required to get to a market value I personally wouldn't touch it under a projected 9 to 10%, if I really really liked it, and most likely pushing into an IRR into the mid teens. That's not me being greedy, that's me wanting to be compensated for time, effort, and most importantly risk.

    All the best!

    Very well put Christopher. I have never crunched an IRR so I'll look into that. I should try to valuate this deal considering time, effort and risk. Thank you for your sage advice.

    0Reply
  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
    10y

    Institutional investors target mid to upper teen IRR's when underwriting value add deals.

    Individual investors have more flexibility, but the majority of individual investors who underwrite this way target 20%+

    0Reply
  • Will F.
    OP
    Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes
    10y

    Hey another question are they targeting a 20%+ return is that gross or net? 

     I think the value of this property at full potential and fully occupied with excellent tenants is $1.4M -1.45M.  This could certainly be more as this area is a B+ residential area (small apartments sell for 4.4-4.9 cap) and businesses are being improved and developed in the area.  (On the flip side it  be economy/RE Market could tank in the next 1-3 years, but I couldn't see this property being worth less than the current PP even in a down economy)

    That's with $1.1 Purchase price in now and about 100k in rehab/expenses.  And let's say $50k for my time and effort.  So net profit would be about $150k.  This wouldn't really be a huge cash-flow deal it's more of just seeking value-ad, possibly reselling/refinancing later or just holding for easy  management.

    So:

    $1.1M Purchase Price ($600k down and $500k financed at 3.5%)

    $100k rehab/expenses (cap improvements, tenant turnover, holding costs, repairs etc) this is difficult to measure because it will actually get close to cash flow if we just put in temporary tenants and raise the residential unit rents

    $50k time/effort

    $1.45 potential "ARV"

    $200k potential profit

    ------------------------------

    $1.45M Projected value "ARV" (possibly higher in a few years as this area is growing)

    $1.25M Total capital into project

    $200k Margin/ profit spread after putting in capital, time, effort, etc.

    It is difficult to buy into this area as I've been looking for the past year and half for something like this to spring up.  If this deal had financing and was fully occupied it would probably sell for $1.3M right now

    0Reply
  • Will F.
    OP
    Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes
    10y

    Hey guys so I might close on this deal.  I've been doing a lot of due-dilligence on property condition etc.

    Anyone else care to chime in?  This property is located on the New "Retro Row" in Long Beach.  Between Temple and Junipero.  

    It's not quite a destination place, but it is within the city of Long Beach.

    We are in escrow at $1.1 M and need to decide today or tomorrow....

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