Mixed use properties, with an office/warehouse mix, is actually a good deal right now for banks. Banks, who are still lending, are looking for strictly commercial real estate. The main question I need answered by a client looking to purchase income producing property today is, How long can you service the debt, if the property is vacant? A good rule of thumb is to calculate your liquidity to total debt. If you have more than 10% cash based on adding your personal debts and the new debt of the property (after downpayment), then you are in a great position to buy. If not, don’t do it. Also, if you are looking to buy any income producing real estate, your leases will have to be for the length of the term of the loan. i.e. 3 year term, lease should exceed three years. Or you need to show the ability to service the debt, with your own personal income, for the lease/loan term deficiency. ie. 3 year term, lease for 18 months, you need to show 18 months debt service based on your current income.
Banker’s like to see income property support itself. If it cannot, then the borrower needs to be able to make up the difference.
Another tip, check with your local commercial realtors to see how many months it will take you to lease the various spaces in the subject property if you lose a tenant.
Posted by Corny Martin on September 25, 2008 at 20:43:18:
This property is a heavy industrial warehouse and office space. Again motivation is there. The Building and trucking parking lot is partially leased with a lot of the leases being to smaller local companies (hard to get info on them) with leases set to expire in the near term, ie 6 months and 1 year. Some of the lease are longer term ie 3 years.
By the way the building is NNN along with CAM charges. There are also some other opportunities to boost income since the owner uses parts of the building for itself and the building is not fully leased.
The Office portion makes $209,000 per annum.
The manufacturing/trucking portion makes $322,000 per annum.
The thing that bothers me about this deal are the uncertain, shaky leases. I would not want to get in there and find out that the owner just put a bunch of companies in there that couldn’t pay rent. One tidbit I forgot is that the owners purchased the property vacant.
The owners are amenable to selling the office building by itself and vice versa.
How would you guys approach a deal like this?
Is there anything missing in my analysis?
**The loan is assumable by the way
I am leaning toward a short term master lease (18-30 months) because I want to get in there and stabilize the property with no risk to myself. I also doubt that the bank will like the fact that the lease albeit NNN are short term leases.
Re: $$$Mixed USE is good$$$ - Posted by Corny Martin
Posted by Corny Martin on September 26, 2008 at 13:15:29:
Actually Pete this is a totally different property. The first property had two office spaces and all of the leases for all of the uses were gross.
The second property however is a 15,000 sq ft office building with a 23,000 sq ft manufacturing and trucking facility. All of the leases are NNN.
Thinking about it again I think that the occupancy is possibly 80% but I’m considering throwing out or discounting those short term leases and purchasing the property at 50% occupancy.
Posted by PeteNC on September 26, 2008 at 14:05:00:
I’m just suggesting that office/retail/warehouse space with few tenants can be tricky because one vacancy can bankrupt you so if that’s the case be careful or pass.
I think it’s a great deal if you can discount the leases of less than 3 years and purchase at 50% occupancy as long as you can cover the debt. Also, you can get commitment letters from the current businesses who’s leases are expiring within 3 years. The lender might even require it. Let me know if you decide to pass on the deal. I’d like to take a look at it.