Sold my buy and hold office space

[Andrea Hardaway]

Investment Info:

Office Space commercial investment investment in Chattanooga.

Purchase price: $625,000
Cash invested: $200,000
Sale price: $1,200,000

Purchased a professional commercial building (6,000 sq ft). Building was originally 3 suites but had been connected to become 1 main corporate office for a medial firm. Divided the building into 3 suites (again). Leased up 2 suites and did owner-occupant of the 3rd one.

What made you interested in investing in this type of deal?

Had an interest in commercial real estate since about 2002. When I started my investment journey, most of the local investors were doing single family and small multifamily flips and rentals. My passion was just not there. So, when we started our property management company, it was an ideal time to purchase a commercial building (my first acquisition and had a great partner). I've learned a lot in the process but very much love the commercial side of investing.

How did you find this deal and how did you negotiate it?

This deal was listed. I always scoped out the commercial market. I found one property in this complex and had it under contract with a partner, but the partner backed out and I didn't feel confident to do it alone. This property was about half the size. My agent reached out to the seller's agent and vouched for me. The property had been trying to move for a bit. There was competition in the complex and the owner had already acquired another one, we worked out a great deal.

How did you finance this deal?

Ended up getting bridge financing in order to close quickly. Then refinanced with a community bank.

How did you add value to the deal?

Converted property to 3 suites and rented out to steadily increase cash flow. After COVID, it was difficult to find long term business tenants. So, when I had a vacancy in one of the suites... I rented it out by the office. This drew therapists, a hotel team (placed while a hotel was being built), and a home health agency. Income for that unit was much stronger renting by the room instead of the entire suite.

What was the outcome?

I sold the property to another owner in the complex who needed to expand his business. We leased back and moved to a smaller unit. It's worked out great for all.

Lessons learned? Challenges?

I did a cost segregation study on the property to accelerate depreciation and reduce tab liability. Great short term strategy. The depreciation recapture at sell was large. I did a clean exit and paid the recapture. However, for longer term planning in the future I may do a 1031 instead and spread the recapture across multiple properties. Then, exit each of those more strategically.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes, am I'm happy to share if anyone wants to know who I recommend.