Should I buy this commercial real estate property?

Question

Should I buy a commercial property in New Windsor NY? Here are the details:

-3 tenants, of which 2 of the tenants occupy multiple offices. The kitchen remodeling store occupies units 101 and 102. Hair salon occupies unit 100. And a doctor occupies unit 200, 201, and 202.

This info was provided by the bank:

address:

1124 Route 94, New Windsor

Purchase Price- $599,000

INCOME

Gross Rents                                                                                                    $88,664

Add: CAM Reimbursement                                                                $11,478

Total Gross Income                                                                                   $100,142

Less: Vacancy & Credit Loss @ 7%                                                  $7,010

Effective Gross Income                                                                          $93,132

EXPENSES

Real Estate Taxes                                                                                        $18,500

Utilities                                                                                                                              $28,000

Total Expenses                                                                                             $46,502

Net Operating Income                                                                           $46,630                 $46,630                 $46,630

Annual Debt Service                                                                               $36,628                 $28,176                 $34,997

(See below)

Cash Flow Surplus                                                                                      $10,002                 $18,454                 $11,633

DSCR                                                                                                                  1.27x                       1.65x                       1.33x

Annual Debt Service

Option 1

65% LTV / 35% Down ($213,850)

Loan: $397,150/ 15 Yrs / 4.57% / $3,052 P&I                       $36,628

Option 2

50% LTV / 50% Down ($305,500)

Loan: $305,500 / 15 Years / 4.57% / $2,348 P&I                                   $28,176

Option 3

75% LTV / 25% Down ($152,750)

Loan: $458,250 / 10 Yr Term/ 20 YR Amort /

4.57% / $2,916.46 P&I                                                                          $34,997

Alternatively, every year they have a delinquent property tax sale where the deeds get sold and you can get a poroperty for really cheap. I found a few offices that will be getting sold due to delinquent property taxes at this year's auction which is in about 60 days from today. Should I buy this office above, or wait and try to get a better deal at the delinquent property tax sale?

Scott Wolf · Answer

@Paul Paquin, it seems like you may be missing some expenses ie. management fees, insurance, snow removal etc.  Not sure if they're just not listed or if they're rolled into Utilities.

Also, you need to know the lease terms(time left, rent increases, base year taxes etc.) and if you can get the same rents if current tenants leave(Market Info).   Best of luck!

Mason Crane · Answer

As @Scott Wolf stated above it would be a good idea to ask for some books and lease agreements from the bank and/or seller. We always request the last 2-3 years tax returns, P&L, and rent roll. Most lenders will want this information as well to accurately underwrite the deal. The lenders terms are fair, considering the long term of the loan, but are they amortizing the loan over the same period? You only show amortization on one loan... unless I've completely overlooked the other numbers. I would push for a longer amortization period, which would include a balloon, but your cash flow will be higher as a result (all other loan data being equal). Don't forget to add a new tax rate in your own underwriting, as that will fluctuate after a sale.

Another thing to consider is why are you attempting to buy this particular property? Do you have experience with this type of asset and know of specific ways to increase the bottom line, or is this more of a hold and cash flow type deal? Whatever ends up happening with this one I wish you luck!

Paul Paquin · Answer

More of an update:

See the corner columns, towards the top on the left side of the building there was a hole in the building that they apparently forgot to fix when they did the roof maintenance. I still have to get the official inspection on the property, but I had a few of my licensed contractors come analysis the property yesterday and they said everything on the inside is in perfect condition, as it's all-new but there are some issues on the outside and the roof. This building has a 7% cap rate but 3 out of 4 of the leases will be up in August 2020. My company, Golden Financial Services (a credit card debt relief agency) is adding a location in NY, so we can take one of the offices here if anyone chooses to move out, so that's not an issue and could actually work out in our favor.

Why buy the building:

The point of buying this building is to get extra income and potentially get an office for Golden Financial. Right now it brings in about 40K of net income per year.

Financing:

On that note, I am also considering purchasing in full through Golden Financial or a separate real estate llc, rather than buying it through bank financing. I am leaning towards this because why pay a bank interest, upfront points, and fees, etc.. when we can finance it ourselves. As far as protecting it from lawsuits, you get insurance for that and could even set up a separate real estate llc to purchase it through, ensuring it's protected from lawsuits.

Another reason to use a bank's financing is that the bank will ensure proper due diligence and verify the leases, but that's what a detailed inspection is for right? And as far as verifying the leases, my company is a financial services company so we should be able to handle that on our own and request the attorney at closing verifies the leases at that point.

I appreciate all your excellent tips and advice. thanks so much

Paul Paquin · Answer

update on the building: The inside is in good condition, pretty much everything is new and nice. But the roof is not new, maybe it only has about 3-45 years left, but they just did a bunch of maintenance on it a few months ago, preparing for the winter. Here is how the roof looks today.

Ryan M. · Answer

@Paul Paquin I don't have an opinion on this deal, but I would be willing to bet that any office building up for tax deed sale will be paid off before the auction.

Should I buy this commercial real estate property?

Most Popular Reply