Posted by RRSmith on December 04, 1999 at 13:41:56:
When do you get the courage up to go to a large scale?
If you bought a option to buy on the above property, what would it be worth per year?
Question for Ray@lcorn or anybody else who has handled a larger commercial project. - Posted by Shawn M. Crawfod
Posted by Shawn M. Crawfod on December 04, 1999 at 11:14:23:
Ray,
I followed your thread with Pete in NYC concerning his mobile home park deal and it got me to thinking about a deal that is available in my neck of the woods(Columbia, SC).
I think the deal may be to big for me but here goes…
There is a 50,000 sf office building downtown that is quietly for sale. It is on Main St. next to a city garage (so parking is available-potentially on a master lease from the city).
The building style is from the 60’s although I’m not sure of the exact age yet.
According to someone who knows the building it is under managed.
It has multiple tenants and no single big user.
Class A office space is currently going for 80 a foot (sale prices) and 10-20 a foot for leases.
The owner is willing to sell the builing for 20 a foot.
20x50,000=1,000,000.
I am trying to secure the paperwork from the property manager as we speak(type).
I am used to buying delapadated residential properties and smaller commercial properties(less than 8,000 sf) and totally rehabbing them. My largest property to date has been 250,000 in cost (land and construction).
I am relativly sure my bank won’t loan to me the 1,000,000 plus renovation costs for this project based on the size.
Do you have any suggestions on how I might swing this deal?
Thank you for any comments and I hope you are out golfing today.
Shawn.
Re: Question for Ray@lcorn or anybody else who has handled a larger commercial project. - Posted by ray@lcorn
Posted by ray@lcorn on December 06, 1999 at 11:28:25:
Shawn,
First, I have to wonder why you are so sure your bank wouldn’t go with you in this deal. Is there some negative history that would keep them from considering the deal, or are you counting yourself out because you haven’t done a deal this size? If it’s the former, then you need to cultivate another lender after making the present lender whole (in a fashion… that means that a bad experience can end honorably for everyone involved if best efforts are made in an honest and forthright fashion). If it’s the latter, then give yourself a check-up from the neck-up, and find out why you choose to believe self-limiting, negative thoughts. From what you’ve described as your experience, I think you are very qualified to step into a larger commercial project. The number of zeroes doesn’t necessarily disqualify you from a deal… your ability to deal with the management issues will override most other factors.
Which brings us to the deal… Without knowing the income and expenses of the project, I can’t begin to offer help on evaluating the property. As I discussed with Pete, I look at all income properties, regardless of type, as an income stream. The value of the income stream is a direct result of the risk and effort required to insure the continuance and the enhancement of the income stream. If the property cash flows at $20 a foot, then there may be a deal that can be structured. If it is full of vacancies, in a negative cash flow position, and the market is weak to boot, then my advice would be for you to pass. But from what I know of the Columbia market (which ain’t much), it’s not exactly a buyer’s market judging from the property prices on some shopping centers I have looked at there, and it is a state capital which is always a plus, so I wonder if there isn’t something lurking below the surface of the deal that causes the valuation to be a little edgy. But that is speculation on my part.
You asked for suggestions on how to swing the deal, and I would suggest that you first determine if it is in fact a “deal”. Here’s how I would approach it:
Step One: Get rid of “stinkin’ thinkin’” (smile!)
Step Two: Get the income/expense data on the project.
Step Three: Get some market data on CBD office occupancy from the planning department or the economic development folks. I would also make a call to at least one real estate leasing broker that is active in the downtown area and ask the same questions as a double check. On a million dollar deal it pays to confirm your information from at least two sources.
Step Four: Evaluate the info gleaned from the above, and determine if the building is viable on the terms offered, with the debt amount that would be required for you to do the deal. On an older building, with no anchor tenant, and what I would guess will be a rent roll with fairly short term leases, you will be looking at acquisition financing in the 65%-75% LTV, a rate of about one over prime, and fifteen year amortization on a straight, self amortizing loan, which almost nobody wants to do any more. More likely will be a five to seven year call, and the amortization term can be negotiated up to twenty years. Some seller financing is allowed with some lenders for maybe 10%-12% LTV. But don’t let the gap between the amount of debt financing available and the price scare you, for there are a number of ways to get the seller the rest of his money.
Evaluate the market as well. Know that you will not in all likelihood be able to change the force of the market you are operating in. Make sure your deal is rolling WITH the flow of the market, not against it.
In my experience, when you are in the process of making the preliminary inquiries of the building and the market, certain information will emerge (sometimes unsought, which is neat) that will give you a gut feel for the quality of the deal. Pay attention to your gut, you’ll have to live with it a lot longer than a building! Above all, this evaluation step is the most important. The phone book is full of potential deals, it’s your job to figure out which of them fit YOUR criteria.
Step Five: Post your findings and intuitions here, and all of us can learn as you go through the process of evaluating, structuring, packaging, and closing the deal. Of course, there is an alternative path that would include passing after the evaluation step depending on the situation. So first things first… get the info!
Good luck!
ray