3 stories, 12 units, Gut reno....Advice??

4 Replies

Hi everyone, My business partner and I are currently prospecting a deal which will involve the gut renovation of a 9,000 sf building in upstate NY. It was formerly used for offices but has been vacant for a number of years. The current owner had an architectural study done, and he has plans drawn up (which we have seen) for the conversion to 12 apartments. The building is equipped with an elevator and a sprinkler system. The project will also include an asbestos abatement, for which the owner has a report. We are in the process of getting quotes from contractors and the asbestos abatement company, as well as securing financing. We would appreciate any advice from anyone who has tackled a similar project. Anything from getting quotes to financing to managing the project and filling the units. What should we be looking out for? What might we run into that we aren’t expecting? What troubles did you have? Thanks in advance! Joe

Has the building been for sale the entire time it has been vacant?  If so, I would be concerned the abatement is significant  and the reason why the property is still lonely.  It may also be difficult to secure financing until the asbestos has been abated - though you would likely be looking builder financing, so it would be possible if you can sell the lender on your plan to repurpose the property and your ability to deliver.

Have the building systems been maintained and service during this window (heating, fire, elevator, etc)?

Ask yourself why the Vendor is not proceeding if he already has had plans drawn?   Is an apartment building the highest and best use for the property?

Are you planning to make the building energy efficient in your restoration work ... what other updates will be required by regulation / legislation?

Just as if you were buying an ugly house, you need to slow down the puck and work backwards from your {hopeful} end state business:  What will be the revenues and what will be your cost to get to the starting line so you can earn those revenues  {presuming an 12-unit apartment is the best use}?  Once you know that, then you can determine what you could/should pay for the property to ensure your venture will be profitable and you will not be selling a 1/2 finished building in a year or two.

Roy - the property has only been for sale for several months, but I believe it has been vacant since 2010. We have similar concerns about the asbestos and are awaiting quotes. 

We are confident that apartments are the best use for the building, and we have a pretty good idea of what our gross revenue will be upon completion, as we own other rental properties in the area. Based on this number, we know what we can spend "all in" to make it a good investment. 

As for why the vendor is not proceeding - I am not certain, but I think he was looking to make the apartments ultra high end, which is very speculative in this area. We are aiming for a more modest tenant - of which there are an abundance in the area.

Thanks for raising these other points. Definitely good things for us to consider. I think most of the systems have likely not been maintained, which is why we want to be able to build a significant cushion into our estimates. 

In terms of financing, we have a mortgage broker doing some research for us. Would you be looking at banks and credit unions, a commercial bridge loan or more towards hard money?

@Joseph Wells

On a vacant building, I would try a builders draw from a bank or lender first - it can be a painful process, but would be your cheapest money.  Failing that, if you have a network of private lenders, go there.  Hard money would be the most expensive option and my last choice. If there is room for the extra holding costs and you have the velocity to keep the timeline short, it could be an option.

Trusting the architectural drawings of a third party unverified is a dangerous proposition. I would do some checking on the architect’s references that drafted the drawings. Also, when were they drafted? Are they compliant with CURRENT codes? ADA accessibility, fire suppression systems, fire access, energy codes, you name it. I would route them through city plan review for a preliminary plan check prior to securing the property. Also, meet with some contractors and get quotes for the rest of the build. There are so many construction costs that a good GC will see that are invisible to the average investor.

Also, I highly recommend talking with your local planning office and discussing if there are any public works projects or private development permit applications on the block of the property. I knew a guy that bought a building and they converted the two way street to a one way street the month after he bought it effectively destroying any form of reasonable access to the property. 

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