[Calc Review] Help me analyze this deal- Commercial mixed use

Chicago, Illinois
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[Calc Review] Help me analyze this deal- Commercial mixed use

Jeff BorrelliPro Member
Investor · Chicago, IL · Member since 2015 · 11 posts · 1 vote

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*This link comes directly from our calculators, based on information input by the member who posted.

I am in a negotiation to acquire a mixed use building in the suburbs of Chicago.
This is my first mixed use building, I own 3 2-flats and used to own a
single family I rented out but now am living in myself.

The
property I am trying to acquire has 2 restaurant spaces on the first
floor, (only 1 kitchen), and 4 apartments on the second floor, (1-2bed
and 3 1-bed). The restaurant spaces were gutted for a particular
restaurant group who was going to build to their concept. They ran new
plumbing all around, HVAC, sprinkler work and did a lot of behind the
scenes stuff like fortifying the ceiling, moving a stair case etc. I
have partners in the deal who run restaurants so we would open 1 LLC for
the building and a separate for the restaurant space. However, the
restaurant spaces will need a few hundred thousand dollars to get them
finished and open.

The property is a very high traffic A+ area/historic building.

Here are the general specs. Negotiations are in the $1.2-1.3 million range;
conventional financing with 25% down and financing 75%. Right now,
apartments rent for a total of $5200/month and ultimately we expect to
raise those and with the performing restaurants, a total monthly income
of $17-18k gross. I ran it through the biggerpockets calculator and I
show that if we can get the total building rent to $18k, we would have
to put $300k down, probably another $100k to update it enough for the
restaurant to pick up part of the tab for their concept:

Does this sound like a terrible idea or a decent deal? IF we weren't going
to open one of the restaurant spaces ourselves, I would have a tough
time thinking this is a good deal but I'm open to any advice on
valuation, (I have no idea how to value the property. The building was
purchased 2 years ago for $1.1M, the group put probably $250k into it,
(which doesn't necessarily all benefit our concept), and now we're close
to closing and just want some verification on this deal or not.

Thanks!
Jeff

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  • Brad Hayden
    Real Estate Consultant · Broomfield, CO · Member since 2015 · 79 posts · 40 votes
    4y

    @Jeff Borrelli -- I think you may have jumped ahead in your analysis. The stabilized end value is one thing, but the big question is … what will it take to get there?

    The restaurant space is vacant, not producing any income and will need "a few hundred thousand dollars to get them finished ond open".
    Currently you only have $5200 in monthly income -- not $18000. You will have negative cash-flow until the restaurant space starts producing revenue. How long will this take and how much will it cost to carry?
    Based on these factors, you will not be able to get 75% LTV permanent financing. You're likely looking at a short-term bridge loan at 70-80% of the total project cost (acquisition, due diligence, financing costs, closing & title costs, restaurant finishing, carrying costs, etc). The lender may require you to bring extra capital into the deal for interest reserves.
    Will the market support raising apartment rental rates?
    Property taxes will be re-assessed and will likely increase after the sale
    Insurance amount seems very low
    Lenders will require some economic vacancy factor in underwriting
    Many lenders consider mixed-use that is under 50% residential to be high risk

    it might be a good deal, but I would want to see a line-item monthly cash-flow analysis for the duration of the bridge loan including both refinance and sale exit scenarios.

    I've done similar analysis for past clients and as the saying goes … the devil is in the details.

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  • Jeff BorrelliPro Member
    OP
    Investor · Chicago, IL · Member since 2015 · 11 posts · 1 vote
    4y

    Hey Brad,

    I appreciate your detailed response.  Here are my answers:

    Our plan in more detail:

    We plan to open two LLCs, One for the real estate and one for the restaurant.  We expect to put $100k into the restaurant space which will be part of the real estate side and I did include that $100 in my BP Analysis.

    We then plan to put another $300k into it but that would come from the restaurant LLC if you will. My partners who run some restaurants feel the "build out" would come from the restaurant which is common in the industry. We expect this to take 4-6 months. Of course it could go longer but we know some contractors pretty well so..we'll see.

    I forgot to include it in my post but I did calculate out carrying costs which would be around $8800/month for all expenses, ($5200 of that covered by apartments), which leaves us with $3600/month or $21,600 for the first 6 months.

    We also met with a smaller bank who would give us 75% LTV, it would be a 20 year loan and interest rate could change every 3 or 5 years...I forget which, but they are willing to do this based on my and my partners experience/assets. I did run the analysis awhile ago so it shows an interest rate of 4.8% which will probably be up to 5.5% now, but shouldn't change numbers a lot.

    In regards to the apartment rent raise, the market will support the rate change. This building is in the heart of the downtown. Also, we have a plan for converting them to short term rentals. I own a STR 1 block away which Nets $2k a month for the past 2 years with 88% booking rate and often people reach out trying to book weekends and weeks that are not available so I know the area can support more, plus we have a big wedding hall 1 block away so we plan to capitalize on that. (I have a 2nd STR on the same street 1 town over which also has more interest than availability). There is a 5% tax to the city for operating a short term rental and I do realize that the city could change their mind and not allow them at any point but worst case scenario we could raise rents slightly still with LTR. There is also an "office" on the second floor we would not need so at some point we would turn that into a bedroom to one of the adjacent apartments which will increase rent.

    You are right about the property taxes. I think I added $2k to the current ones but they will definitely go up but I don't expect a significant raise, (maybe that is something I can check with the city based on my expected ARV).

    In regards to the insurance, I did ask my State Farm agent for a quote and gave him all of the details and that's what he came back with.  I also tried to be very conservative on all of my building expenses including an $1800/month management fee which we would be paying ourselves/go into cash flow at least for the foreseeable future.

    If the restaurant fails, we would at least have the build out done for 1/2 restaurants and could rent the spaces.  We also plan some activities for additional rental income because our restaurant would be a brunch/lunch place and then we could rent it out in evenings/weekends for groups/events and or rent out the kitchen as that's something that is also of need in the area.  (These hopeful additional rental opportunities are Not part of my analysis at all).

    Hope that helps.  Let me know anything else I can answer. Thanks!

    1Reply
  • Brad Hayden
    Real Estate Consultant · Broomfield, CO · Member since 2015 · 79 posts · 40 votes
    4y

    @Jeff Borrelli -- additional details definitely help.

    A couple of last thoughts:

    Do you have the $300K for restaurant buildout or will the 2nd LLC be borrowing it? Lenders will look at global debt load and cash flow when they see common ownership.

    Have you stress-tested your scenario? 
    - what if buildout takes 8-10 months
    – what if the restaurant doesn't meet revenue expectations
    - what if the lender comes back in final underwriting with 70% LTV or 6% rate
    – what if one or more of the apartment tenants moves out
    – what if etc …

    There will always be risks, but it looks like you have a good plan.

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