Would Small Town Commercial Property in Oklahoma Work as Multifamily Housing?

Question

Hello. I'm new to BP, but I see a wealth of knowledge in this community, so I'm here to seek your advice.

I own two properties in eastern Oklahoma. I lived there a few years back and tried to be an entrepreneur. I bought an old closed movie theater in the downtown area with lots of free on-street parking. It was a distressed property and I got it for a good price. It ended up costing me a lot more than expected to renovate the building. I turned the old single screen into a more modern two screen theater. I thought I had been careful and conservative when creating my business plan, but after a short time it was better for my family if I would go back to work elsewhere for better pay and much better benefits. So, I did.

Now, I have moved away and I'm left holding two properties in that small town. I've tried to sell them, but no takers. One property was the small house where I resided. After lingering on the market, I finally decided to rent it out. That is working pretty well. I talked to someone at the chamber of commerce there who told me that what that town needs is more rental property. He says he often gets people asking what kind of places are for rent. I guess that makes sense as this town is mostly a bedroom community for Muskogee these days. It is only about 20 or 30 minutes from there.

So, over time, I've started looking at my theater building in a new light. Could it be turned into multifamily housing? It was recently renovated about 5 years ago, and I just put a new metal roof on it last week. The renovation included all new plumbing, all new electrical (600 amp service), all new heat and air (three 5 ton central air systems using natural gas heat and one 2.5 ton electric heat pump system). It also included a fire sprinkler system, insulation in the attic and walls, a new stucco facade on the front, metal exterior elsewhere, structural repairs, and more.

The building shares one common wall with the business next door, but the front, back, and one long side are in the clear, even if only the front faces a street and the others are on a clean and sunny alley and parking lot . The building is only currently about 4,050 square feet, but the auditoriums have about 18 foot high ceilings which would allow to increase the total square footage of the building to about 6,000.

I've checked with the code enforcement official and he says it is zoned C1. I asked what other uses are allowed besides commercial and he said that it can be just about anything... residential, multi-family, hotel, retail, etc. I also wondered about parking. He said that as far as he knew, there isn't any reason why people couldn't continue to use the free public parking in the area. There is a small city lot near the back of the building, and lots of on-street parking in the downtown area.

Would it be worth it for someone to convert this building to multi-family housing? I already have about $250K in the property, so the cost will only go up from there.

If you made it all the way through, thanks for taking the time to read this long post.

Richard C · Answer

Downtown Checotah hasn't seen much commercial development in a while. There are newer buildings that replaced some that burned down a few decades ago. Some buildings have been remodeled or seen new tenants come in and open a new business. The theater renovation was probably the most noticeable change in at least a decade, since it included a new facade and building exterior and seriously changed around the inside as well.

The town did get a new Wal-Mart Super Center and a new McDonald's in 2008. Of course, these are not downtown like the theater. They are out by one of the two major highways that pass by the town. Not far from the Wal-Mart is a reasonably new bowling alley, too.

I would love to think that Walgreens or CVS would like to consider my theater, but I doubt they would want a downtown location. The building is smaller than they typically use and it doesn't have it's own parking. It doesn't really have room for a drive-through either, unless they can make the alley work as a drive through, but I doubt it. A smaller pharmacy might work, but I wouldn't know how to recruit one.

I've been trying to recruit a new theater operator for over 3 years now, but have had no luck, even with offering a lease/purchase deal. It's hard to imagine how I can get anyone's interest for another purpose that requires additional investment considering the mathematical dilemma I seem to be in.

The problem with continuing to use it as a theater is that this would also require more investment. Since I closed the theater over 3 years ago, the movie theater industry has been rapidly converting to digital projection. My theater is still only equipped for film. That conversion would also cost a minimum of $80,000 for my two screens. I didn't close because I didn't have digital projection, but it is a serious barrier for anyone interested in reopening. Then there are the traditional barriers I faced when I decided to close, inadequate revenue, stiff competition, people losing interest in going out to the movies, etc.

If anyone is interested in using the theater for any other feasible purpose, I'd be glad to hear it. But, the fact is that nobody has come forward, even though everyone in town knows it's for sale. One church did talk to me, but they lost interest. I originally listed it with a local realtor, but quickly realized he wasn't promoting it outside the local area. I've tried to do that myself, but based on results that hasn't gone so well either. I've tried talking to business brokers, but they aren't interested in helping me since the theater closed after only one year of operation and didn't have impressive sales. The value of my property is in assets and in condition. The location isn't bad as far as the town goes, it's half a black from the center of town. Being in Checotah itself causes some concern. That is one reason I can't find another theater operator. It's not as populous as some would like, and is nowhere near locations others seem to be interested in. I believed it would be big enough, with 20,000 people in the county and no other movie theater, but it didn't work out that way for me. Maybe for someone else with different and better ideas.

I'd be happy to talk to a commercial broker, if any were interested in helping me, but I've been reluctant to commit to any realtor again since it's my belief that they are likely to simply list the property somewhere and forget about it if nobody comes knocking. Do commercial brokers do any more than that? The only ones that I read that promised to do more was one who did real estate auctions. They promised to promote widely, even worldwide, prior to the auction. The problem is that there is a significant charge even if they don't sell the property. To me, a realtor shouldn't get paid unless he gets results. If I'm paying minimum's without a sale, then they shouldn't charge such high commissions if they do sell.

I'm not trying to insult anyone, I'm just skeptical that anyone will be able to help. I guess that is why I'm thinking that I may have to find a new way to make the property appealing to a buyer. It just doesn't sound like multi-family dwelling is the way to go.

Joel Owens · Answer

Richard honestly I think you have a very tough road ahead of you with those numbers.

You have 250k in it. You estimate let's use the high side of 80k. That's 330k in it.

23,000 a year income according to you for estimate.

Factor 50% costs for apartment units NOI would be 11,500 a year.

At an insane price of a 5 cap which isn't likely for that area would be a 250,000 sales price. You would still be under water for 80,000 plus another 20,000 in resale costs for about 100,000 negative.

You need really a commercial broker on the ground locally there who is familiar with development. They can run numbers and tell you highest and best use. Even with highest and best use you might still be under water for what you owe.

Would a Walgreens or other pharmacy want to go in there?? They might pay the kind of money if location is good to make you whole.

Even though the general zoning is C-1 which allows according to you for many classifications the site plans still have to be approved by the county, city.

Bill Gulley · Answer

Okies get a lot of ribbing up here, LOL, Tulsa....yes, OK City area.....yes, maybe even Broken Arrow, but really, examine the market carefully, not saying being the first to do something is risky, but it usually is. Sorry to crush your dreams, LOL.

A residential conversion might be the best thing to do, but I just doubt it, I'd say there will be more commercial ventures that could take the space.

Here a theater was turned over for live theater, concerts, seminars even wedding receptions, but that town isn't like here, that might work but off hand, probably not.

A bowling alley was converted into a sporting goods catalog store. Another bowling alley was turned into a wine store featuring wine from all over the world. Another theater was turned into a church (that might work there). Another theater is now a restaurant/bar, that might work there as well.

It's a large space, open and does the floor slope forward? That's an issue.

You already have restrooms. Residential will require new plumbing through out the interior, $$$$, HVAC may need to be changed and ducts will be needed, $$$$, constructing a second floor inside an existing building will cost more that new construction, $$$$$, interior insulation, $$$$, interior electrical $$$$, separate meters for utilities, $$$$, now, so far what kind of rents can be obtained to cover these additional expenses?

Or, leave the place close to what it is and lease it for some other purpose, even at a lesser amount, you have less debt coverage or investment to cover, net may be better off. The less you have to do to the place the better off you'll be, IMO. :)

Deborah Burian · Answer

I admit, my first thought was that it would be a cool space for an uppity, artsy, lofts above, cafe and gallery below type development... @Bill Gulley , you have crushed me...

Richard C · Answer

I'm not thinking about artsie, uppity people or real estate development. I'm just telling you what I think the place could be... a multifamily building with a cafe in front. Cafe to me means something like a little diner or simple restaurant. It doesn't have to be upscale or based around coffee. I know "cafe" is French for coffee and may sound uppity to some people, but where I come from in Oklahoma, a cafe is just a small, humble restaurant. The facility is already there for that since the theater building has the facilities for it already without renovation, or at least not much.

I agree that contractor could help me on figuring things out, but I thought there might be someone here with ideas on whether this is a good idea or not. I think you, Bill, seem to think it's not. Fair enough.

I don't think everyone wants to rent a place in the country for their guns and dogs. People do live in apartments in Checotah. I've met several people who own a number of rent houses there. The man at the chamber of commerce who said they needed more rentals has several himself.

Would a building that cost $330,000 including conversion and generates maybe $23,000 per year in rental income be attractive to an investor? What about to someone who would "live above the store" and bring in maybe $14,000 per year in extra income from rentals, and then earn something from their small restaurant?

Bill Gulley · Answer

I suggest you speak to a good contractor. The HVAC won't be the same when you put up interior walls, by the time you run new ducts your existing units could be much larger than required or less than is required, depends on the layout, not just the volume.

I think too, that you need to better research other commercial uses, IMO, I doubt the town is ready for the artsie uppity center of town coffee shop types, just doesn't fit in my mind. Most like open spaces where they can shoot their guns off and let the dogs run....the closer you get to Arkansas....LOL

Bill Gulley · Answer

This rather impossible to say if it's financially feasible. Is the building free standing or in a row of commercial buildings, a residence will need windows.

It's common to use a property zoned at a lower concentration/ use, doesn't mean you won't need to meet residential standards for a conversion.

Might consider turning it into storage for other businesses, storage of files, small inventories, furniture.

You first need to assess the market, if this is somewhere like Enid, I'd say you have a problem, knowing the town wouldn't hurt.

Jeff S. · Answer

@Richard C - Welcome to BP Ricard! I don't have much experience with these types of projects but my first question would be: How much can you expect from the property (annual gross income)? Do you have a property management company lined up as well? When the city official you spoke with talked about people asking about rent houses, did he say there was a preference for a certain unit mix (2/1, 3/2, etc)? Once you have unit mix, expected gross rent, you can start evaluating cost/sqft to build out and see if its feasible. May need to involve an architect very early on in the discussion and be prepared to shell out some cash for the feasibility study - or atleast a free dinner or two! Please keep us posted on this.

Would Small Town Commercial Property in Oklahoma Work as Multifamily Housing?

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