How soon can I refinance a commercial building?

Question

I am looking to purchase a historic house converted to a 4 unit office building right in great trendy downtown area - I would be converting it to 6 spaces and using one space for my own business. The price is 275K.

I have been getting some push back from the commercial lender I use because the building will be vacant on transfer so it will take a small cosmetic 1 month rehab and some more time to get it leased up. So my DSR had to be good enough to carry the whole loan assuming I get 0 rent which was going to require more down.

I am now thinking about doing what I do with my single family BRRRR. If I purchase this with hard money, how soon can I take it to a bank to get it refinanced? Soon as I have signed leases?

Stephanie P. · Answer

@adam craig

The finishes may be restricted. Specific colors, flooring, ceiling materials etc... that you may have to put back to period specific after renovation.

Adam Craig · Answer

Great stuff thank you! I have extensive knowledge in single family with more then 50 deals and 30 properties. But I am just beginning to dip my toe into commercial. My goal is mid size to large apartment buildings but as I was looking for a place to rent for my own business I came across this building which is in my city and seems to be a good fit. My early numbers show good cash flow at full occupancy and I have a free or low rent spot for my business.

I have no experience leasing office space but we do a great job on our single family with professional photos/ listing to all the marketing websites and I have researched leased and available space in the area.

Would this type of building ever warrant a commercial broker to fill the space or should we just use our in house PM company like single family?

Adam Craig · Answer

Thanks for the insight. I am buying the property on hard money and plan to refinance when it is filled. So I will try and leave it as a 4 unit if possible.

Stephanie P. · Answer

4 unit properties are easier to finance for the borrowers and the rates are generally a bit lower.  Also, when you go to sell it down the line, the pool of people who will qualify for the financing is greater.

I would get my financing in line first and then change it to 6 units or whatever, just knowing you may have to convert it back later.

Russell Brazil · Answer

Most commercial loans have prepayment penalties too, so keep that in mind.

Adam Craig · Answer

Right now it is 4 units. But one of the units is so large (used for small/medium sized law firm) I wanted to break it up in hopes of having better success renting it out quick. So you are saying leave it as a 4 unit and it would be beneficial?

Stephanie P. · Answer

Adam,

You may be in a pickle.  Converting it to 6 spaces limits the number of available properties to comp it to, it changes the make up of the available financing and shrinks your clientele.

The answer to your question is the valuation for commercial properties derived at using the income approach. The appraiser will do a narrative appraisal (usually around 85 pages) and they do a comparable market analysis which includes market rents, market trends and any external obsolescence depressing the market like wage stagnation, population growth, industries leaving or coming into a market etc...  They do want to see comparable sales, but the income approach is what they will use for valuation.

Can you take it back to 4 units?

Stephanie

Adam Craig · Answer

Follow up question - This is a 4 unit office and the plan is to convert to 6 spaces. When I looked for comps I went back nearly a decade and I was unable to find what I would consider a comparable - this is an old historic house converted to office space. There are around 8 other properties in this down-town area like it but not have sold. How are commercial lenders going to determine the value - comparable buildings or the rent coming in?

How soon can I refinance a commercial building?

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