My potential partners and I are considering purchasing a mixed use building, 1 commercial space and 4 residential. There are family members of the current owner in 2 of the residential spaces, the other 2 are rented at $950/mo. A local rental agent has told me he can rent the 2 family occupied spaces at the same $950/mo. He keeps the first month's rent. Both family occupants would vacate at closing.
The commercial lease is up, but the current occupant is looking to re-up at $1600/mo. If we buy, we think we can negotiate that number up another $100-200/mo.
The building covers almost the entire lot, so there will be little to no landscaping costs. One partner and I are lawyers (one coporate, one real estate/land use), the other is an accountant, so the professional costs will be covered.
Current asking price is almost $800k. My partners and I have been contemplating moving at $650k. Like most borrowers, we'd like to put as little down as possible. We've heard from Seller's agent that Seller might be willing to do take back financing on a portion.
Running the numbers myself, my guess is that at $650k, we might have to put a full 20% down and get a 30 year amortization with a 6-7% rate to make our debt service coverage ratio. I'm estimating real estate taxes at about $6k and insurance at about $4k. I think I'm pretty accurate on the taxes, but I'm unsure whether I'm in the ballpark on the insurance. Any thoughts or advice? The purchase would be purely for investment - none of us is concerned about taking income from the property - so we're pretty comfortable from an income capitalization standpoint.
Full Version: Mixed Use Financing
Here are the comments off the top of my head:
1) If you wait until after acquisition to negotiate the lease, the analyst doing the credit would think something like {2 vacant residential units and the commercial unit could be vacant soon}. This is not a deal killer, but just something to be mitigated. If it were me and I am looking at three professional partners, I would make comments to the effect of the additional comfort provided by personal guarantors and market conditions allowing for a quick lease up of the vacant units. Something like "there is demand for space, but even if there isn't the personal cash flow of the guarantors can cover the shortfall".
2) 80% on mixed used might be a stretch. A lot of lenders go to 75%. Once again this is not a deal killer in most places, but keep it in mind that in some they might ask you for more money.
3) Taxes and Insurance are not the only expenses. Utilities such as garbage pickup. Someone has to go take care of the tenants when something breaks. You might want to consider a reserve for major fixes in the future such as roof repairs.
4) 7% fixed rate for 30 years might be hard to get. You might be able to get something between 6% and 7% if you let them reprice it every five years.
5) Non-bank lenders offer 30 year amortizations, but most bank lenders offer up to 25 years with ten years maturity. With strong guarantors, I would try bank lenders first.
6) At $650,000 purchase price with a NOI of around $49,560, you get a 7.6% cap rate. I personally like to see it at 8% or higher, but it is not as horrible as other prospective deals I have seen. Assuming a $520,000 10 year loan with 25 year amortization, a 6% rate fixed for the first five, you get a debt service of $40,523 with a 1.22X debt service coverage. Once again, I like to see it at 1.25X or higher, but it is something that could be gotten.
Good luck
1) If you wait until after acquisition to negotiate the lease, the analyst doing the credit would think something like {2 vacant residential units and the commercial unit could be vacant soon}. This is not a deal killer, but just something to be mitigated. If it were me and I am looking at three professional partners, I would make comments to the effect of the additional comfort provided by personal guarantors and market conditions allowing for a quick lease up of the vacant units. Something like "there is demand for space, but even if there isn't the personal cash flow of the guarantors can cover the shortfall".
2) 80% on mixed used might be a stretch. A lot of lenders go to 75%. Once again this is not a deal killer in most places, but keep it in mind that in some they might ask you for more money.
3) Taxes and Insurance are not the only expenses. Utilities such as garbage pickup. Someone has to go take care of the tenants when something breaks. You might want to consider a reserve for major fixes in the future such as roof repairs.
4) 7% fixed rate for 30 years might be hard to get. You might be able to get something between 6% and 7% if you let them reprice it every five years.
5) Non-bank lenders offer 30 year amortizations, but most bank lenders offer up to 25 years with ten years maturity. With strong guarantors, I would try bank lenders first.
6) At $650,000 purchase price with a NOI of around $49,560, you get a 7.6% cap rate. I personally like to see it at 8% or higher, but it is not as horrible as other prospective deals I have seen. Assuming a $520,000 10 year loan with 25 year amortization, a 6% rate fixed for the first five, you get a debt service of $40,523 with a 1.22X debt service coverage. Once again, I like to see it at 1.25X or higher, but it is something that could be gotten.
Good luck
I agree with everything that LU said, the only thing that I recommend is this.
Seeing how you're using this property as an investment and given the worst case scenario all you have is two vacant apt, that can "EASILY" be filled up. Granted they can be filled, the question is timing it take to get that done.
Now that's not an issue, if anything that gives you the bargaining power to get the property at a lower purchase price. With my clients that come to me in this situation, I do as LU says, but our goal is to have the property sustain itself. We would aim for 10% down, with 10% secured in another asset. After a minimum of good payment, a request can be made for removal of the securitization of equity in whatever you pledge. This will be your personal guarantee. Meanwhile you're putting $ back into the project.
Financial sources love seeing partners that have strong financials and tax returns because they will know you can sustain the debt if it comes. Thus the risk is split between three professionals, that make good livings (As a majority).
I would try to get the Commercial Tenant to Agree to the lease before closing, and make this a contingency in the purchase agreement (I'm not sure what your relationship is with the tenant, you may want the current owner to negotiate it. Since you're in the industry I bet you would feel more comfortable doing that) This will increase the bottom line, and chip away at the financial sources risk sensitivity.
As for the way the loan would be structured. It would be based on a 240 month amortization, three diff options for term, and with a ppp you should be good to go.
You want to make sure you have thier business expenses or schedule C that shows what thier yearly expenses are, trash utilities, etc... that affects the numbers quite a bit. If the Commercial Tenant doesn't have a NNN lease, negotiate that in iwth the increase. Then you won't have to worry about it, and you're starting off way ahead of the game.
It's late here, but I really wanted to answer this question. L.U. did a great job, and I think this sounds like a strong deal, with the right circumstances, and especially with the limited vested interest... maximizing your leaverage is key.
I wish you the best of luck. Let us know how it goes!
Seeing how you're using this property as an investment and given the worst case scenario all you have is two vacant apt, that can "EASILY" be filled up. Granted they can be filled, the question is timing it take to get that done.
Now that's not an issue, if anything that gives you the bargaining power to get the property at a lower purchase price. With my clients that come to me in this situation, I do as LU says, but our goal is to have the property sustain itself. We would aim for 10% down, with 10% secured in another asset. After a minimum of good payment, a request can be made for removal of the securitization of equity in whatever you pledge. This will be your personal guarantee. Meanwhile you're putting $ back into the project.
Financial sources love seeing partners that have strong financials and tax returns because they will know you can sustain the debt if it comes. Thus the risk is split between three professionals, that make good livings (As a majority).
I would try to get the Commercial Tenant to Agree to the lease before closing, and make this a contingency in the purchase agreement (I'm not sure what your relationship is with the tenant, you may want the current owner to negotiate it. Since you're in the industry I bet you would feel more comfortable doing that) This will increase the bottom line, and chip away at the financial sources risk sensitivity.
As for the way the loan would be structured. It would be based on a 240 month amortization, three diff options for term, and with a ppp you should be good to go.
You want to make sure you have thier business expenses or schedule C that shows what thier yearly expenses are, trash utilities, etc... that affects the numbers quite a bit. If the Commercial Tenant doesn't have a NNN lease, negotiate that in iwth the increase. Then you won't have to worry about it, and you're starting off way ahead of the game.
It's late here, but I really wanted to answer this question. L.U. did a great job, and I think this sounds like a strong deal, with the right circumstances, and especially with the limited vested interest... maximizing your leaverage is key.
I wish you the best of luck. Let us know how it goes!
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