How to Fund Commercial Purchase and Renovation?

Question

My partner and I are evaluating a 2 story commercial space that is zoned Mixed Use. We are considering having Office Space/Retail on the 1st floor and then Apartments on the 2nd floor. What are some options that you have used successfully to fund the purchase and renovation for such a project? We believe the reno costs will be about 50% of what we are able to purchase the property for.

Ash Patel · Answer

I have done a ton of mixed use buildings.  I just received appraisals on two buildings that are full gut renovations.  The appraisals came back at over twice what I paid for the buildings, which was shocking.  The reason for that is how highly they are valuing apts right now.  In Cincinnati, value add apt go for about $35k/door.  The appraiser wrote in $75k/door ARV.  Who would have thought appraisers would ever overvalue a property?

Katie Neason · Answer

We have done what is effectively a BRRRR on a couple of commercial properties and are working on a 3rd. On the first we were able to get an 18 month interest only loan for the purchase and renovation cost that automatically converted to amortizing permanent financing with a local bank.  We refinanced it last year with a local credit union and got all of our initial cash out. The second one, we are wrapping up the renovations now. We got a loan for the purchase price and renovations from effectively a hard money lender. It is interest only for 12 months. We had to move fast because it was days from foreclosure and we did not put any money in the deal so the hard money lender made sense in spite of being expensive. We are in the process of getting permanent financing in place now either through a local bank or credit union. If the third one goes through we will get a purchase and construction loan from a local bank. It sounds like our renovation budgets were bigger than what you are looking at. The first one it was 200% the purchase price, the second and third is about 75% of the purchase price.

Jacob Simpson · Answer

@Katie Neason, thanks for the input! We are looking at an interest only loan for 3-6 months while we renovate, and then converting to a 15 year fixed. There is a 20 year amortization option, but it is basically an ARM that adjusts every 5 years with a floor of 4.5% on the first adjustment, so the 15 year seems to make more sense at this point. I'm working on our pro forma now, and even if I'm half wrong on the lease rates, I think it is still a good deal. The area is underdeveloped and desperately needs better housing options for young professionals or maybe even traveling executives. Still exploring that market...