Hello BiggerPockets family,

First and foremost thank you for taking the time to click on my post, this is my first big commercial "flip" (still in progress) and also my first time blogging. I want to share my experience, and hopefully can get some feedback on what I can do better.

Before we start a little background about me.

My name is Theodor Chung from Federal Way, Washington, I went to the Marine Corps at the ripe age of 18 and finished my active duty at 22, after I got out I joined my family business (restaurants, bars, small commercial property management). I received my Real estate license in March 2019, and I am currently a broker in Skyline Properties Inc. My dad is my main business partner and we are now moving our business/investment type into larger commercial properties/projects.

Since July 2019, My dad and I, have been looking for a 1031 exchange once we sold our commercial property in Lacey. After paying off loans and other lines of credit, agent fees, etc we had about $900,000 to invest. We raised another 300k to invest about $1,200,000 (looking to put $1.2million as a 30% down payment), for a possible commercial property from $3 million to $4 million price range. 

We finally found a commercial property listed at $3.7 million at an 8.8% cap rate in Lacey, WA. It took about 3-4 months to close (late October), at the price of $3,525,000, a 5-year balloon loan at a 4.990% interest rate. We also made sure to get the prepayment penalty waived saving us 5% of the future sales price.

We chose this property because it was an add value property, we knew how much we were going to have to reinvest (around $150k-200k), and what our game plan was going to be. Buy, Rehab, Rent, List/ or Refinance, and Repeat. A commercial-style BRRRR.

A basic rundown on this property,

Price: $3,525,000, multi-tenant (11 units), 36,500sqft of leasable space, 2.08 lot size, the previous landlord has done a poor job in maintaining this property. Four empty units were essential in filling up before we refinance or list it on the market.

Rehab: 

1. Tree removal

The first thing that needed to be taken care of was the trees. Six huge full-grown sycamore trees standing about 80-100 feet and 16 Ash trees, producing over 400lbs of leaves and yard waste every season, making the property deteriorate, lack of visibility, and the worst the roots destroying the parking lot. We contacted several tree removal companies and found a great small local tree removal company to cut down 6 sycamore trees and grind the stumps, and trim the 16 ash trees all for $17,500.

We ran into some problems along the way with the city, figuring out permits, traffic/lane control, replanting plans, electrical and communication lines, and having our tenants work their businesses around the servicing. BUT!!!! THE TREE REMOVAL AND TRIMMING MADE A HUGE DIFFERENCE! The visibility was amazing, there was no leaf debris and waste, and car and foot traffic increased dramatically.

What I've learned: Make sure you check with the city to ensure what trees are yours and what trees are the cities. Even if they are the cities they expect you to apply for a permit if you want to maintain them.

Cost: $17,500 for tree trimming, removal, and stump grinding. $3000 for replanting new trees and permits.

Total: $20,500.

2. Landscaping

The overall property needed new mulch for a fresh look, brushes trimmed and some removed, and new bushes/shrubs planted. The plants were overgrown and some bushes blocked visibility in hazardous ways (ie; blocking the field of view when exiting, not allowing drivers to see cars incoming from the left side). I shopped around on craigslist and found a great deal, $1200 for 8 hours 3 employees. Needless to say we finished everything in a span of 12 hours.

We just completely cleaned out the landscaping, made it super simple and clean, new mulch and a simple layout of shrubs to give a commercial and professional feeling to it. Landscaping made it so that the property looks well maintained and taken care of. We used about 1500lbs of red mulch delivered from a mulch company, and plants from home depot!

Overall the process was very simple and straight forward, with no problems that were encountered.

Tip: Make sure you shop around for some jobs like this

Cost: $1200 for labor, $1200 for materials and supplies.

Total: $2,400

3. Parking Lot

I took months of planning and getting proper bids to get this down, I realized contractor's prices can fluctuate tremendously and to get bids and renegotiate can save you a lot of money. Some problems with the parking lot consisted of alligator erosion, cracks, potholes, destroyed extruded curbing, plant matter, non-existent striping, and tree roots destroying the asphalt.

Found an asphalt contractor on craigslist and he gave us the best bang for the buck. Servicing 36,500 sq ft of the parking lot with 110 parking spots, replacing 160 linear ft of extruded curbing, and 1620sqft of asphalt patching, for a total of $13,375. It took about 2 days for prepping, 2 days for seal coating, 1 day for striping, 2 days for asphalt patching and removal, and 1 day for extruded curbing!

When everything was completed it looked GOOD, with the trees removed and visibility being an all-time high, the parking lot just stood out, clean, black, and solid white lines. At this point we started receiving calls from the city inspector, city mayor, and other random officials calling to compliment us on our job and improving the community.

Some problems I encountered were, the work had to be down in sections, traffic control and lane control, temporarily suspending and effecting tenants businesses, coordination with all the tenants the contractor, and the WEATHER. If you are ever going to do asphalt work make sure you do it during the months of April-August, no rain, and plenty of sunshine.

Tip: Coordination with tenants, because parts of the parking lot will be closed, is paramount.

Cost: $7300 for 36,500sqft of seal coating x2, striping, and crack filling. $6,075 for asphalt patching and removal.

Total: $13,375.

4. Upstairs Apartments

This was the most complex and biggest part on the rehab side, we had an upstairs 2000sqft unit that was completely trashed and in need of major renovations. Our initial plan was to subdivide it and create one apartment unit, and one professional office space, but this ended up backfiring and delaying the overall process. The city denied us to use it as a commercial space, so we had to hire an architecture to draw a floor plan to make both units residential spaces, and up to code.

So we decided to subdivide it into two residential apartment units, with full kitchens and a full bathroom in each. Renting at $1200 a month, tenants paying utilities, and a small CAM/NNN fee.

The apartment unit was not touched since the '70s and in need of new floors, walls, electrical services, plumbing, windows, bathrooms, kitchens, roofs, paint, fire alarms, and everything else you can think of.

What I've learned: planning and communicating with the city and contractors can save a lot of future headaches, time, and money.

NOTE*: Our next projects are going to be either a hotel or multi-family, I would love to partner with someone experienced in these fields. 

Cost: $120,000 for electrical, plumbing, framing, roofing, paint, flooring, appliances, windows, permits, architecture, and everything related.

We had also done pressure washing, but that's relatively self-explanatory. It was paramount that we fixed what were possible liabilities to our lender and or future buyers lenders.

RENT:

We had 4 empty units, if rented out with a long term 5-year lease, would dramatically increase overall property value, financing for potential buyers, and cashflow.

1. Suite A

Suite A is a 2600sqft unit, we decided possible businesses could be beauty services, pawnshop, and or convenience stores. We decided that a convenience store would increase traffic to the overall plaza and that it would be a good anchor, increasing the synergy amongst tenants businesses.

We starting building the unit based on the business of a convenience store, without a tenant occupying it. We planned to complete all major tenant improvement construction inside, which consisted of 11 door walk-in cooler, shelves, display racks, freezers, signs, flooring, paint, security, demolition, countertops, and inside storage. We were pretty confident in our networking skills and us having relations with the Korean business community. The point was we would do most of the legwork, and the tenant would just apply for licenses and buy inventory and start as soon as possible.

We put in about $40,000 in tenant improvement, given 3 months free rent, and the next three months 50% off. All to get a $3200 a month NNN 5 year lease.

NOTE: We decided to go with a convenient store so we can add a $30,000 11 door walk-in cooler as a fixture, that way lenders have some sort of collateral.

$3200 x 12 =$38,400 Gross annual income

Expenses covered by CAM/NNN charge

$38,400 NOI / 7.625% cap rate = $503,606 in added value.

2. Suite B1:

1000sq ft apartment with 1 full bathroom, full kitchen, W/D, appliances, den, and 1 bedroom, for $1,200 a month.

Another great reason why we choice Suite A as a convenient store was so that we can have the store employees and or owners rent out the Suite B1 unit, which they did.

$1,200 x 12 = $14,400 Gross annual income

Expenses covered by CAM/NNN charges

$14,400 NOI / 7.625% cap rate = $188,852 in added value.

3. Suite B2:

Similar situation as B1, 1000sq ft apartment.

$1,200 x 12 = $14,400 Gross annual income

Expeneses covered by CAM/NNN charges

$14,400 NOI / 7.625% cap rate = $188,852 in added value.

4. Suite F

Suite F is a 3000sqft unit, full restaurant turnkey, vacant for 8 years, and ready to just put in a tenant with the license to start operating.

We found a tenant looking to open up a burger joint and bar, made a killer deal, $3,500 a month with CAM/NNN charges for 5 years.

$3,500 x 12 = $42,000 Gross annual income

Expenses covered by CAM/NNN charges

$42,000 NOI / 7.625% cap rate = $550,819 in added value.

5. I also took the time to renew some of the other existing tenants, lock in 3-5 year leases, and fix the escalation on them. To make it more of a stable secure investment for the next buyer.

8480sqft tenant was on year to year lease, changed to 5-year lease.

700sqft tenant 2-year lease, set to expire this year, renewed it to 5-year lease.

4200sqft tenant 3-year lease, set to expire this year, renewed it to 5-year lease.

Since I have my broker's license, I did all the property management duties including leasing out these units, which saved me commission fees, property management fees, administrative fees, and anything else related to leasing/tenants.

REFINANCE and/or LIST:

This is currently where we are.

I have talked to some bigger commercial only brokerages to get a valuation, underwrite, and give their professional opinion if we did list this property. 

Proposed a deal where I would give a 4.5% commission, and I would be getting a 20% commission from the listing side since I will be a co-agent/finders fee.

The cap rate in the lacey area is anywhere from 6%-8.5% depending on a lot of variables, needless to say, it is at a higher cap rate than King and Pierce county.

From an 8.8% cap rate, and considering the neighborhood, leases, tenant base, rent roll, cap X for renovations, and comparables, commercial brokerages valued ours anywhere from a 7.5-8.25 cap rate.

Valuation of

$420,000 Annual NOI / 7.5% cap rate = $5.6million

$420,000 Annual NOI / 8.25% cap rate = $5.09million

comparbles in the market show rates at 7.25%-7.75% cap rate.

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Refinance it, cash out the added equity, and reinvest it into our next project.

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I learned a lot from being a property manager, landlord, real estate agent, putting in sweat equity, and a first-time investor!

Finally, by no means have I included everything in this single blog, nor am I an expert in all of this, so please ask me any questions, so I can learn more! I want to continue flipping and adding value to commercial properties!

Thank you for reading and taking the time!