Should we rebuild a triplex?

Question

we are buying a 60x137 lot zoned CRO in a great spot. The buildings were demolished but slabs and utilities are still there. I am wondering  if it is a good idea to rebuild a triplex in today's construction market or try to convert it to a parking lot and lease it to the business next door? Any thoughts are appreciated for Jacksonville Florida area.

Scott Choppin · Answer

We would approach it like this, underwrite the income and expense model for:

1. Parking lot

revenue (rents) - (minus) operating expenses (opex) = Net operating income divided by cap rate for parking lots in market = value - (minus) cost to build parking lot (pave, fence, light) = profit generated

2. Triplex -

revenue (rents) - operating expenses (opex) = Net operating income divided by cap rate for comparable apartments = value - cost to build (hard/construction costs + soft costs + development impact fees + misc (less credit for fee per above) = profit generated

Two ways to compare (really three but we'll leave out IRR for now)

A. NOI/Cost = development cap rate, or the amount of NOI generated given costs of the project, compare the two ratios

or

B. NOI/Market Cap Rate = value - less cost to build = development profit, compare the two profit amounts generated from the development of each projects

Easy to compare the two ratios or profit amounts and see what works better. You do need to take into account the following:

- How much capital you will need to do either scenario, the parking lot will take a lot less capital

- How much time you will need to do either, the parking lot will take a lot less time to build and start generating revenue.

- Zoning - does the zoning allow use as a parking lot? Obviously it used to be residential, but when torn down did it revert to some other zoning? In other words, did it used to be a legal non-conforming use? Maybe triplex is allowable, maybe not, need to check the present zoning for allowable uses.

General observation:

Parking lot = low cost/low investment, lower cash flow, less stable source of cash flow, less available buyers for a parking lot (less buyers = less potential value).

Apartments = higher cost/larger investment, larger cash flow, more stable source of cash flow, more buyers if you ever want to sell (more buyers = more potential value.

I am an offer of help if needed for further thinking and design for your projects.

Thanks.

Josh Cuthbertson · Answer

One thing to check is if you get any credit for impact fees? If there was a triplex there before, that could be a huge savings. I don't know that area, but out here Impact fees on a project like that can be in the hundreds of thousands of dollars. Call the building department and ask for a fee estimate. That would be a good place to start.

Carolyn Morales · Answer

Thank  you so much Scott Choppin.  I do already have CVS corporate Real Estate contacts saved. I will find out about impact fees and also pursue CVS before moving forward on a new build. I have sold a commercial lot before that was rural, nothing like this. I owner financed that one. That worked really well also.

Scott Choppin · Answer

@Carolyn Morales, sounds like triplex is the right choice from a zoning standpoint.

Yes, you could sell to CVS to expand their parking lot. Have you spoken to CVS? If not, try talking with the manager of the location and ask if they need to expand their parking lot, watch his reaction to see if that gets a positive reaction from him. If he reacts neutrally or positively, then ask for their "corporate real estate" contact, call them and ask them to give you an offer to buy you out of the parking lot.

Once you speak with that person, just give them the basics, lot size, address, etc. Let them do the work of investigating the zoning questions, they do that all the time.

I'll end by saying this, the best profits I've ever generated on our projects, was when we entitled (rezoned) land and sold it to others at a profit without building anything. Designing, building, and financing a triplex will be a challenge compared to a straight sale.

The sale of the land will be less profits, but it could be fast.

And in the real estate development business, speed/velocity is king.

Good luck and we wish you success.

Carolyn Morales · Answer

Scott Choppin, The zoning is still CRO.  I would have to apply for an acception to build a parking lot  The building dept told me I could put a triplex there again. Certain businesses require 70 ft width but there are certain exceptions... which is the part I don't understand so much

Carolyn Morales · Answer

Scott Choppin, Thank you for your detailed input on the scenarios. I could just see if CVS pharmacy wanted to buy it from me. They had to narrow their parking lot that leads to their exit out of the drive thru window area  around this lot. In other words CVS beautiful stucco fence border 2 sides of this lot completely 60x 137.

Carolyn Morales · Answer

Thank you! Josh Cuthbertson, I Will do that!

Should we rebuild a triplex?

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