All Forum Posts by: Nick L.

Rebecca Mitich at Whyte Hirschboeck Dudek. Not cheap, but worth it.

@Julian Illingworth

Looks like a good cash flower but I agree with @Aaron Montague that the maintenance and capex looks light. I don't know about Portland taxes but $100/month property tax looks amazingly light too.

What is your value-add/exit strategy with this? Could you split the title to separate the SFR from the apts and make the lot conform to zoning? Useful article from BP

If you can't do that you are unlikely to be able to find a future buyer. (That would explain the current price.) I would also have concerns about your ability to refi after the initial term. So it might be a rare case where you should pay the note down quickly to get to a low leverage position where it will be easy to refi or owner-finance in the future.

@Shane H.

Super interesting breakdown, thanks. I agree, it's interesting to talk this over with someone who shares a common interest. Whenever I start talking about merging condo titles or states that allow HOA super-liens my family tends to change the subject... maybe they are scared to admit how fascinated they are.

I agree that you could cut some expenses but even in your better case scenario $455/floor/month is nothing to get excited about. And the building is only going to need more TLC and face more competition as it ages further. My guess is that the Cali and local investors have found this out the hard way and that's why they're not buying the developer's floors even at their current bargain price.

However, maybe you can find a higher and better use for your space or for the building as a whole. Here are a couple of ideas that I have seen work:

1. Apartment conversions. You said that the downtown residential market was hot. Maybe you can throw $80-100/ft at one or two floors and pull in $1.50/ft. I haven't run the math but I bet that would work.

The downsides are the lack of parking and the fact that the other tenants and condo assoc. might object. You might be able to overcome both of those with negotiation though. For example some recent developments in my city have leased allocated parking spaces from adjacent city-owned lots. And if you talk with the other unit owners they might be flexible about changing usage to bring some life into the building.

Another issue to watch out for in residential conversion is unintended mechanicals work. For example the current elevators/sprinklers/electrics etc might be adequate for office space and grandfathered into code compliance. But the moment you touch them for residental conversion you will have to upgrade the whole systems.

Still, residential is usually a very compelling conversion case.

2. Creative/shared/incubator space. Essentially leasing to a bunch of small hobbyists and small businesses. Individually they have little or no credit or financial backing, but you can charge a premium for small studio-type workspaces and the overall tenant base as a portfolio can be stable. This can work even better with a single creative focus, like food & beverage or fashion.

Your TIs are minimal or zero but income will be less than residential and you will have a lot of non-leasable space. I bet it would still be a better business case than the current Class B offering though. 

If you could pick up the floors for $20k each and the condo assoc. was ok with the creative space concept, I think I'd be tempted to do this just as an experiment.

@Shane H.

So if I understand you right the breakdown seems to be:

• 2 floors mostly unoccupied, for sale together
• 2-3 floors owner occupied, would probably do a sale and leaseback
• 5-6 floors non-OO, investors may or may not be willing to sell

If that's correct, you should probably talk with the other investor owners. If you own 5 or 6 floors and they collectively own 5 or 6 floors, you would be in a good position to propose dissolving the condo and forming a partnership with yourself in the lead.

Can you go through some of the operational math? You suggested $7-9 psf. Is that gross, modified gross, NNN or absolute net? How many sq ft are there per floor? What kind of TIs would you have to give a tenant to get those rents? What are the condo fees, what do they cover and what financial state is the association in?

Ha ha, no, this guy made a bad business decision but I don't think he committed any felonies!

Back to your deal... I wonder why the owners of other floors don't want to buy the 2 floors that are for sale. Maybe approach them and talk to them about it. It would be much more attractive if you can control a lot of the building in one go. Maybe through an option if not an outright sale.

I've done a similar deal for a mixed use building in Milwaukee, WI. The technical term for this problem is "fractured condos". In my case there were 10 units. The developer had sold 2 of them. The other 8 eventually got QC'd to the bank and I was able to pick them up as REO. This was 3 years ago. It took me another year to acquire the 9th unit and right now I am finally under contract for the 10th and last one.

Based on your post and my experience I would say this could be a good opportunity provided that:

a. You know that you might never be able to acquire every unit in the building, or it might take decades. So you have other exit strategies as backups.

b. You buy the units at a price that reflects the assets as distressed.

c. You own enough of the units from the outset to control the condo association (typically 75%)

d. You have good cash and financing to do the initial deal and pick up other units opportunistically. Most lenders will not touch fractured condos regardless of the cash flow.

From your post, my first move after acquisition and lease-up would likely be to give the condo association some teeth against tenants not paying their share. Either they will start contributing and the association can build reserves, or they might be motivated to sell to you.

Oh and check your state's laws about requirements to consolidate condo titles. In my state you need unanimous agreement from all owners and primary lienholders. But I believe in some others you only need 90% agreement. So you might be able to consolidate even if you don't own the whole building.

I have some commercial multifamilies in Milwaukee. As a point of reference, my 1930s 8-units have hot water radiators and each one costs me about $4-4.5k/year in heating costs. So about $500/unit/year. You are looking at double that.

Some possible reasons:

- Inefficient heating system

- Leaky building - old windows and no attic insulation

- Tenants leave windows/storms open

To me, the heating expense problem is a huge plus for your investment. If you can identify a way to cut the bill in half you will save $16k/year in operating expenses, which will drop straight to the bottom line.

Lots of good comments here. I would just add that if the cost of premiums is the deciding factor you could look into getting Replacement Cost with a high deductible. That will often work out the same price as an Actual Value policy. Most of the time you would not even make a claim for a small amount anyway so you're not losing out.

I have older buildings with outdated construction methods and use Replacement Cost with riders for debris removal (in case of total loss) and Law and Ordnance (since the city would require modern code compliance on any major repairs).

Most commercial RE transactions use a single broker for dual agency (where the law permits). So your best bet is to call every commercial listing agent you can find, describe your search as specifically as possible, see what they currently have and get added to their list. As Joe Bertolino pointed out a large agency like Marcus and Millichap may function as a buyer's agent for you if they know other properties on the market but this is not their primary role.

Agreed that the brokerage loan is cheaper than a hard money loan but I think it's a false economy due to the risks. The best approach might be what you suggested, just selling some stocks for a while and using the money to finance the RE purchase.