I stumbled across a potential deal wanted y'all to poke some holes in my back of the napkin math. Our rent for the crossfit gym is going up $1250/month if we sign a year lease, $2500/month to go month to month. We have outgrown the current space and see some opportunity to get a larger space, with less rent which will help us grow membership and cut OPEX; however that location is 1.5 m west of our current location in the heart of Tobin Hill San Antonio. I am not too concerned about losing members due to the location but I will definitely have less visibility. That's especially true due to all the Riverwalk units and condos near the Pearl that are about to come online. Keep that in the back pocket.

Now, I have an opportunity to purchase 8800 sf of PRIME location space, in TH with 35 frontage. It has ZERO parking spots, I know that's a deal killer, UNLESS I can solve that problem....I think I can. There is a business adjacent to this space that has 150 parking spaces and they use about 50% at peak hours. The previous owner had a handshake agreement to use the parking. Now that business is under new mgmt so I am working to see if they will enter a written agreement to provide around 20 spots, most of which will be used during our peak hours 5-7 am and 4:30-7:30 pm. No parking agreement= no deal, full stop.

Let's say I work the agreement out, here are the deal specifics as the sellers initial offer:

$1.4mm ask, owner carry

Assume 10% down (I will have to raise this)

The 8800 sf is broken into 2700 sf of freshly remodeled "creative space lease offices" that are expected to lease for $7k/month minimum. The gym would pay $5k/month to occupy the warehouse in the back for a total of $144k annual gross rents.

Current year tax was $10k, lets assume double that to $20k and another $20k in expenses for a NOI of $104k.

$104k/$1.4m purchase = 7.4 Cap

Owner will finance with a wrap that will cost us 2 points over his 5% rate

He offered at 3 year balloon but its all negotiable at this point, I will counter with a longer one and won't do the deal at three year balloon. Will ask for 30 year amortization, P&I would be around $8300.

I'd like to end up with a 5-7 year balloon and a year of IO to help provide some cash to put toward refi with local bank once stabilized if the market holds on. If the market softens, we will have 4-6 years left for it to come back.

What am I missing? It seems like a deal if I can solve the parking issue. BIG if.

Edit: visibility not viability in first paragraph.

A Few thoughts:

1) You should consider an SBA 504 Loan. They will do up to 90% Financing for cheaper than 7%. Plus, owner-finance deals always get messy because of poor record keeping.

2) The parking issue will always be a problem unless you get a permanent easement on their parking. As an owner, it will always be a looming risk that you wont be able to renew the parking agreement. Especially if a new owner wants to redevelop the site. No parking on an office/retail use (which is what you are) is a deal killer unless its in a high-pedestrian area. If you were a lease tenant, a parking agreement would be sufficient, but not as an owner.

3) Wraps are risky. First, they usually are a violation of the seller's Deed of Trust. Second, you have a risk that the seller defaults on his note and pockets your payments. Then the bank can foreclose on your property and there is nothing you can do about it.

who is going to manage the "creative spaces" to keep them full? Those things turnover quickly.

what happens if you lose the gym?

Agreed on parking. How did the current owner think he could develop that amount of space with no permanent parking? Where are these other tenants going to park? Same place?

Also, unless those "creative offices" are already leased, you are paying him a 1.4% Cap Rate on your own money, not a 7.4%. If you have to lease them, there will also be leasing and marketing costs that you will bear, plus vacancy loss until they are leased.

The lack of parking posses a significant leasing problem for the offices as well. "Creative" offices are often crammed full of people, moreso than a traditional office use. Run you numbers as if the spaces never lease, or only get 1/2 of the rent you are expecting and see how it pencils out.

These offices also dont usually lease with 5-year leases w/ extension options. They usually have 6-12 month leases to "see how it goes." Also, since you are occupying a majority of the space, the building would be considered "Owner Occupied" by banks, so a stabilization point is irrelevant in the underwriting. Its all based on your business performance.

If I'm buying this building, I want to know where he gets his lease "Expectations" from. Are there lots of comparable spaces in the neighborhood with the same parking conditions? They are brand new, so it seems he's effectively giving you a wild-assed guess on what they will lease for.

Great points, thanks for the input. The parking is my largest concern for sure.

We will look at refi as soon as possible, but don't have time for an SBA loan at this point (we've been approved for one in the past....long long process). Long story short the current landlord led us to believe we were going to have access to an additional 800 sf that would have helped us open an additional revenue stream to offset the increased rent and asked us to sit tight while he worked a ground lease of his adjacent lots. We did that and unfortunately when he came back to us he changed his stance on the additional space and wants the full $2500 increase for us to take that space...its a garage he uses for storage. So we are scrambling to make a better deal, worst case we sign the one year deal at the $1250 increase.

The seller owns $100mm in real estate in Austin and SA and has a very nice relationship with his lender per him. I am not too worried about due on sale clause but will definitely make sure it's been discussed. Sellers MO is to buy distressed, force some equity and owner carry them to a new buyer, not his first one. I'm also very guarded about this and will have our broker and attorney involved.

Any thoughts on the deal numbers outside that?

Meant to add: you buy empty buildings based on a Price/sf, not Cap Rate. Cap Rate is for buildings with long leasing history and comparable properties, not for owner occupied buildings. Its ok to project it, but its not a "deal" indicator for your situation.

Great question, I have no experience with them but I have a broker who does, my wife is a new agent so with some tutelage from her mentor we would manage the leases. The seller has interested parties but does not have leases yet. They are a group of 8 attorneys.

Do they have long term leases in place? 8 attorneys sounds better than the 20 private suites I was picturing.

Diggity said:

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Agreed on parking. How did the current owner think he could develop that amount of space with no permanent parking? Where are these other tenants going to park? Same place?

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Ya know I don't know. Interestingly enough google maps lists the parking I am approaching as parking for this space. Like I said, if it can be solved it make the property more valuable, but it's gotta be a written agreement. What happens to my agreement if that company goes out of business? Long term I would want to buy some of that lot or some other opportunities across the street.

Diggity said:

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Do they have long term leases in place? 8 attorneys sounds better than the 20 private suites I was picturing.

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Not yet, I have not clarified the term on the leases he sent them, but I will be working on that depending on what the owner of the parking says.

Bitter Old Man said:

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Also, unless those "creative offices" are already leased, you are paying him a 1.4% Cap Rate on your own money, not a 7.4%. If you have to lease them, there will also be leasing and marketing costs that you will bear, plus vacancy loss until they are leased.

The lack of parking posses a significant leasing problem for the offices as well. "Creative" offices are often crammed full of people, moreso than a traditional office use. Run you numbers as if the spaces never lease, or only get 1/2 of the rent you are expecting and see how it pencils out.

These offices also dont usually lease with 5-year leases w/ extension options. They usually have 6-12 month leases to "see how it goes." Also, since you are occupying a majority of the space, the building would be considered "Owner Occupied" by banks, so a stabilization point is irrelevant in the underwriting. Its all based on your business performance.

If I'm buying this building, I want to know where he gets his lease "Expectations" from. Are there lots of comparable spaces in the neighborhood with the same parking conditions? They are brand new, so it seems he's effectively giving you a wild-assed guess on what they will lease for.

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Please explain the 1.4% cap rate on my own money, lost me with that one. I put $20k in expenses for the year but can add to that number for sure. I'd rather be conservative as hell with this.

It's the damn parking you're right. It has to be solved.

There are a lot of these creative spaces in the area. The Pearl area and the freshly remolded Quicksilver building are prominent ones. Broker is investigating the rates in those two areas.

Bitter Old Man said:

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Meant to add: you buy empty buildings based on a Price/sf, not Cap Rate. Cap Rate is for buildings with long leasing history and comparable properties, not for owner occupied buildings. Its ok to project it, but its not a "deal" indicator for your situation.

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Excellent point. If I buy the building with a partnership and have the gym llc enter a lease is that still considered owner occupied?

That would be great, but you might not get the opportunity.

If someone buys up the place and decides not to share parking, you are SOL.

Wait, so you are the gym? I thought that was a different gym paying you rent.

Why are you paying rent to yourself in the original scenario?

mwp02ag said:

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Bitter Old Man said:

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Meant to add: you buy empty buildings based on a Price/sf, not Cap Rate. Cap Rate is for buildings with long leasing history and comparable properties, not for owner occupied buildings. Its ok to project it, but its not a "deal" indicator for your situation.

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Excellent point. If I buy the building with a partnership and have the gym llc enter a lease is that still considered owner occupied?

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Yes. But Owner Occupied is actually easier to finance than investment property, so its not a bad thing.

Diggity said:

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Wait, so you are the gym? I thought that was a different gym paying you rent.

Why are you paying rent to yourself in the original scenario?

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We own the gym yes, our current rent is $5k which is comfortable at our current membership. We are currently running 27-30% profit per month and if we grow as anticipated at the new space we would be able to take what we want from the business and then be able to pay our best and brightest coach to be the GM we are training her to be. That's a big driver for what we want. We want to build this into a business we do not have to be present for, most crossfit gyms can't do that but we are well on our way. We would love to get coach Ruby out of her 9-5 she hates and make her a full time employee. We have to grow or cut expenses more to do all that, if we can get both in one space its a bonus.

So we will need to partner for the down payment, I already have a colleague who I am working with to buy an apartment complex who has raised money before for a syndication. He likes this play and believes we can get it done IF we can answer all the questions.

Thank you all for the comments and questions, please continue, I am grateful....and a skeptic soooo here we are.

Sonora Bank loves a previous deal with similar numbers. Called it "rent replacement" however we need 30% to get that financing. The only way I can do this deal is to use the owner carry, hopefully for just a year. I had not thought about the SBA loan, thats a great play if the SBA will do refi. Not sure about that.

mwp02ag said:

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Bitter Old Man said:

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Also, unless those "creative offices" are already leased, you are paying him a 1.4% Cap Rate on your own money, not a 7.4%. If you have to lease them, there will also be leasing and marketing costs that you will bear, plus vacancy loss until they are leased.

Please explain the 1.4% cap rate on my own money, lost me with that one. I put $20k in expenses for the year but can add to that number for sure. I'd rather be conservative as hell with this.

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It's the damn parking you're right. It has to be solved.

There are a lot of these creative spaces in the area. The Pearl area and the freshly remolded Quicksilver building are prominent ones. Broker is investigating the rates in those two areas.

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You're calculating your cap rate using a full rent roll that doesn't exist. The only rent you have day one is your own. So your actual "Going-In" Cap Rate is 1.4%. If there are leases in place when you buy it, that would give you a 7.4% "Pro-forma" Cap Rate. You don't buy investment property off of "Pro-forma" caps. Think about it this way: If you pay a Pro-forma Cap Rate, you are basically paying the seller for leasing work that he hasn't done, while you take all the leasing/market risk.

TLDR: You are paying too much. If you do all the leasing work and everything goes perfectly, then your reward for all that risk is a 7.4% Return? That's a crappy deal.

Bitter Old Man said:

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mwp02ag said:

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Bitter Old Man said:

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Also, unless those "creative offices" are already leased, you are paying him a 1.4% Cap Rate on your own money, not a 7.4%. If you have to lease them, there will also be leasing and marketing costs that you will bear, plus vacancy loss until they are leased.

Please explain the 1.4% cap rate on my own money, lost me with that one. I put $20k in expenses for the year but can add to that number for sure. I'd rather be conservative as hell with this.

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It's the damn parking you're right. It has to be solved.

There are a lot of these creative spaces in the area. The Pearl area and the freshly remolded Quicksilver building are prominent ones. Broker is investigating the rates in those two areas.

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You're calculating your cap rate using a full rent roll that doesn't exist. The only rent you have day one is your own. So your actual "Going-In" Cap Rate is 1.4%. If there are leases in place when you buy it, that would give you a 7.4% "Pro-forma" Cap Rate. You don't buy investment property off of "Pro-forma" caps. Think about it this way: If you pay a Pro-forma Cap Rate, you are basically paying the seller for leasing work that he hasn't done, while you take all the leasing/market risk.

TLDR: You are paying too much. If you do all the leasing work and everything goes perfectly, then your reward for all that risk is a 7.4% Return? That's a crappy deal.

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Fantastic explanation, I get it now. The 8 attorneys have leases in hand supposedly, but had not executed upon last conversation with the seller.

mwp02ag said:

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Sonora Bank loves a previous deal with similar numbers. Called it "rent replacement" however we need 30% to get that financing. The only way I can do this deal is to use the owner carry, hopefully for just a year. I had not thought about the SBA loan, thats a great play if the SBA will do refi. Not sure about th

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504 Loans work very differently from the SBA Small Business loan you got. You might be surprised at how easy it is. Not sure if they offer Refi's through the program. I kinda think they dont.

Another Option: Have the Seller Finance just the equity portion that you are needing. I.e. the bank puts in 70% (they can do better), Seller Finances 20%, and you put in 10%.

mwp02ag said:

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The 8 attorneys have leases in hand supposedly, but had not executed upon last conversation with the seller.

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I invest in a lot of commercial Office buildings. This is meaningless, especially when attorney's are involved.

very interesting thread. I feel like I'm learning a lot just observing.

Good luck with the deal OP. Some of the best deals out there have some hair on them. It's just a matter of getting it solved.

Bitter Old Man said:

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mwp02ag said:

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The 8 attorneys have leases in hand supposedly, but had not executed upon last conversation with the seller.

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I invest in a lot of commercial Office buildings. This is meaningless, especially when attorney's are involved.

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Ha ain't that the truth! Thanks for the replies and wisdom....wanna partner up on some prime SA space?!?!

Diggity said:

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very interesting thread. I feel like I'm learning a lot just observing.

Good luck with the deal OP. Some of the best deals out there have some hair on them. It's just a matter of getting it solved.

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Thanks Diggity! Me too, just investigating this is really helping me understand more of the commercial side. You're input is appreciated.

Bitter Old Man - where are you located? I'd love to buy you lunch sometime and pick your brain. I've never seen someone convert CRE terms to message board as easily as you have.

You realize your property could be effectively worthless or even negative value without parking right? So adjacent property comes under new management and now he wants to sell? I don't see how it is your responsibility to negotiate parking for a property that is not even yours.

DallasAggie0 said:

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You realize your property could be effectively worthless or even negative value without parking right? So adjacent property comes under new management and now he wants to sell? I don't see how it is your responsibility to negotiate parking for a property that is not even yours.

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Of course, that's repeatedly been stated but can't be stressed enough. To be fair, the previous owner's handshake agreement with the previous parking lot owner was over three years ago. The property has been vacant for that time and the investor who bought it recently.

The person that can solve the problem will force a tremendous amount of equity with this deal IMO. It's a huge problem. I'm not convinced I can do it but IF I can....

So this "investor" has recently bought it, cannot introduce a new parking agreement and cannot lease the space and now wants to sell. I will be interested to see if this goes anywhere.

mwp02ag said:

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Ha ain't that the truth! Thanks for the replies and wisdom....wanna partner up on some prime SA space?!?!

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That depends, does it have sufficient parking?

mazag08 said:

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Bitter Old Man - where are you located? I'd love to buy you lunch sometime and pick your brain. I've never seen someone convert CRE terms to message board as easily as you have.

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I live in Austin... I also like to eat.

mwp02ag said:

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Sonora Bank loves a previous deal with similar numbers. Called it "rent replacement" however we need 30% to get that financing. The only way I can do this deal is to use the owner carry, hopefully for just a year. I had not thought about the SBA loan, thats a great play if the SBA will do refi. Not sure about that.

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Also, by the way, the reason banks love Owner Occupied properties is that they don't count against the bank's CRE Concentrations on the regulatory side, which is a big deal to them. Community banks have to be selective on who they lend money to for investment real estate, but not so with Owner Occ.

BOM

If I develop a commercial property and try to sell are you saying a new buyer will discount my price if I am a tenant regardless of my financials?

MWP, my opinion, your broker should be able to answer nearly all these questions or get you to the right person without asking on a pubic message board. They're making $35k+, lean on them heavily. If they're good they will get it done and provide you answers and paths to a solution, if not why are they making a nice commission to shuffle a PSA back and forth.

That being said there are great recommendations on this thread.

Full disclosure, I'm a retail commercial broker in SA.

Dr T and the Women said:

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BOM

If I develop a commercial property and try to sell are you saying a new buyer will discount my price if I am a tenant regardless of my financials?

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No. Assuming you have a lease signed that will continue past the sale, you should be treated like any other tenant. The OPs building currently has no tenants, so he shouldn't give the seller credit for nonexistent tenants.