I'm experienced in residential (36 units and counting over the past ~15 years) and have a request for the experienced commercial folks..
I'm under contract to purchase a 6,100 sq ft commercial Class B office space in the Raleigh, NC area. It's in a good area, well maintained 15yr old building. I'm 30 days into the 60-day examination period. My plan is to lock in tenants during the examination period, otherwise I bail from the deal.
My problem is: the numbers are pretty good and I want to make sure I'm not walking away from a gold mine. I don't have a commercial mentor/expert so I'm turning here for any advice:
- If we rent at $22.50/ft/yr that's about $11,400/mo gross rent.
- HOA dues are $1,250/mo and covers the exterior/roof/landscaping
- Taxes are $800/mo
- Insurance premium is quoted at $150/mo
- Utilities are tenant-paid (although negotiable until we find a tenant)
- Property management is 7% or $800/mo
I can carry the mortgage + expenses, but would obviously buy a building with a tenant ready to move in. My lender isn't a fan of me buying a vacant building for an unknown period of time. Covid presents somewhat of an unknown risk/reward here.
To the experienced folks: is this a deal I should walk away from if I don't lock in tenants?
I'm not experienced (as in ownership) with commercial property. I've never seen the term "HOA" used with anything other than residential property. Is this a mixed use property where you don't own the whole building? I'm not quite sure I get it.
I know a few people who got filthy rich with commercial real estate and I know a few who went to the poor house. Commercial real estate has some serious risks that owning apartments, condos and homes don't have e.g. it can take several years to find a good tenant and even when you do find a tenant you still have an inherent risk where you always have to worry about whether or not your commercial tenant's business will be successful enough to pay rent and survive to the end of the lease. I always figure the odds of a commercial tenant being successful is not great at all since most new businesses fail.
Another downside to commercial properties is when your tenant's business fails you get stuck with cleaning and renovating 6,100 sq ft (in your case) compared to 800 to 2700 sq feet for an apartment or fairly large home, but commercial properties also have much higher walls, ceilings and tenants jackhammer concrete floors and install plumbing and electric that costs thousands of dollars to remove and change back to what was original.
While the profits look much better than renting residential properties the risks are many times greater. Maybe, commercial real estate investors do great when they have 50+ commercial properties and they are making enough profits where a 15-year vacancy for one or a few properties is no problem.
@Russell VanBlon I'd love to have a conversation with you. I'm based in Durham and currently manage 170k square feet of commercial space. Message me your contact info and I will reach out.
How many units? What's your LTV on the $875K purchase price?
To give you an idea of the sort of risk aversion on these situations, the commercial lender I represent sets a max LTV of 50% on purchase loans where the subject property is vacant.
Vacant commercial properties are a gamble for lenders. Single unit office spaces can be an even greater risk than multi-unit office spaces. Debt coverage, length of lease, remaining years on lease, type of tenant, among other considerations all play into the decision.
Best of luck!
@David Bilandzija , it's a single 2-floor building that could be split in half (each floor), 4 ways (one quarter each tenant), or even split into 8-15 separate rooms. LTV would be 85% if we lock in a tenant. Thank you for the info!
Lots of risk vacant, what does tenant financials look like? Do you have another $5-10/foot for TI?
@Ronald Rohde , haven't locked in a tenant yet. If we get a tenant at the target price, there's plenty to cover TI.
I be cautious to walk into a vacant commercial building without a tenant in toe unless you KNOW your getting a screaming deal.
We were UC on an 18K sq ft space, thought we could get 18/ft and during our inspection period we figured $16/ft was more likely. Doesn’t seem like that big of a change until you cap it out and it cost 500k+ of value
Find the tenant first.
Thank you @Jordan Atkin for the solid advice.
Vacant commercial property is a sweet spot for purchasing- Essentially it is no longer an asset but a liability. We see vacant spaces at %30-%50 of the price of fully rented. Your team that does the leasing is a huge part of your success. One other option is breaking the space into very small units for retail. It becomes less about what your charge for foot and more about the affordability. A lot of people can pay $1000 a month for a $500 sq ft retail, not as many can spend $4000 a month for a 4000 sq ft space.