Renovating property for commercial use...

6 Replies

Hello all. My husband and I have a small one acre lot with a home that is currently being rented. It is located at a very busy 4-way intersection. We have already had the property zoned commercial. We would like to clear the lot and build either multi residential or business units. We currently have a mortgage. Can someone out there give us some advice. We have consulted a tax accountant who says we will have a hefty capital gains tax should we decided to sell. We would like to look at all of the options available in order to see if we can create residual income ourselves rather than selling and giving this opportunity to someone else. Thanks.

If you sold you could possibly 1031 exchange tax deferred into another property. You might have commercial zoning but still will need site plan approvals and density approval for what you want to do with the site.

Do you own the corner? Is there a stop sign or red light there currently? What are the daily traffic counts? Residential doesn't tend to do well at busy intersections unless a project with many hundreds of units. Commercial retail usually likes the corners the most.

Do you have a map? I would have to see the address to comment further. 

@Debbie Cooper you have a good problem assuming the property is in demand. What you do with it should depend on your goals and timeline. 

Easiest case is to find the best buyer for the highest and best use. To do that, just talk with the top commercial brokers in your area. If you don't know who they are look on loopnet/talk to anyone who has a sign on a commercial property in your area. Talk to the big brokers like CBRE , Marcus & Millichap, Cushman & Wakefield and JLL. Don't sign a listing with any of them just ask their opinion of what you should do with the property.

If you sell there are several ways to defer gains including 1031, contract sales and opportunity zones.

If you don't want to sell you can always develop the property yourself or in partnership from ideas you get in the above process. As an example, if a couple brokers say that it should be a gas station, ask them to speak to a few gas station developers who may be interested and work out a partnership with them or pay them as consulting fee for helping you set it up.

As I understand your objectives, you want a commercial real estate asset that will produce income for you. You are thinking about scraping the lot and building either a multifamily or a commercial property. Another option would be to renovate the property and lease it to a commercial customer. 

I would first examine the last option. What is the rent today? If you change the use to commercial, what will the rent be? If you improve the property by investing, for example $20 per square foot, what would those improvements bring you in increased rents? If the rents increase significantly under that scenario, then, after some time, you might consider either one of the other options. 

With this strategy, you minimize your financial exposure while you garner much more detailed information about the neighborhoods, tenant types, uses, etc. In my office in Denver, yesterday, I had this same discussion with a small investor who is struggling with what to do to increase his income. Because we knew well the neighborhood in Denver where his property is located, we were able to give him specifics about the increased rents brought by the tenant improvements. 

Regards,

Rodolfo Canon

Hi @Debbie Cooper .  I'm always a believer in finding the highest and best use of the site.  Having the property zoned commerical gives you many options.  You mentioned you have a mortgage.  Do you have a lot of equity in the property?  Could you pull out some to help with building/renovation/construction costs?  Do some homework on going rates for commercial rents vs residential rents in the area.  Is there one that makes sense over the other.  Maybe a mix of both?