Purchasing a commercial building

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Purchasing a commercial building

Posted by: Cantcam Oct 28 2004, 03:04 PM
Hi,

Thanks for all the helpful info on this website. Here’s my situation. I’m currently looking for office space for my new medical practice. I’m planning for future growth of my practice and also would like to start investing. With the assistance of my commercial real estate broker, I’ve come upon a newly built commercial building. It’s zone for mixed commercial use (offices and retail.) It’s located in a fast growing community within a park-like setting. (population growth is ~20% in the next 5 years.) The average annual household income is $80,000-$100,000 in the area. It’s also located near major roads with some visibility from the roadway. Its purchase price is $125/sq ft, which is comparable to similar developments in the area. Since its 13,000 sq ft, the price would come to $1,600,000. My practice would only occupy ¼ of the building with the rest leased out. I’m able to come up with a 10% down payment (I may have access to a 25% down payment, but it may not be available before closing. I working with other investors to try and get to 20%) The developer will build one or two more similar buildings in the area in the next 1-2 years depending on demand.

Assuming that I would be able to get financing, would this be a wise investment? Should I even be considering this since cash flow would be an issue and financial resources aren’t that great?

Concern # 1: I would have to find tenants immediately; otherwise I wouldn’t be able to afford the approx $13,000 monthly mortgage (aside from taxes, eminence, utilities, etc.) Are there ways around this, such as through special loans? My broker thinks that finding tenants will be easy, but going more than several months without having any tenants will be impossible.

Concern # 2: Would this investment pay for itself in a reasonable amount of time? Maybe if I take into account current market rates for office space which is $18-20/sq ft (more for medical offices.) Also my broker suspects that its value would grow appreciably (no numbers on this, but suspect 5-10% per year.)

Concern # 3: Although I have an excellent credit history, would a lender even touch this loan since there isn’t a rental history on the property, my medical practice would be new and this would be my first commercial real estate venture?

Are there any other concerns I should be aware of? I’m still considering other options: such as purchasing a smaller and cheaper building, buying undeveloped land and building my own office or leasing some office space. Any comments would be appreciated.

Thanks,
cantcam

Posted by: loanuniverse Oct 28 2004, 04:47 PM

Cantcam:

Let me see if I can address some of your questions and give you some feedback.

” would this be a wise investment?” Not enough information to give feedback on this. What is the average rent per sq. ft. in the area? How many sq. ft. of leaseable space do you have? What kind of financing can you get? Is the property located in the right area {a good neighborhood is good, but being close to a major hospital is great for physicians}. Is the building finished? Is it all office or all retail? How good of a location is it for retail?

” My practice would only occupy ¼ of the building with the rest leased out.” The low occupancy percentage might keep you out of some nice programs such as the SBA 504 that allows for property financing with 10% down.

” : I would have to find tenants immediately; otherwise I wouldn’t be able to afford the approx $13,000 monthly mortgage (aside from taxes, eminence, utilities, etc.) Are there ways around this, such as through special loans?” Not really, if a request like this crossed my desk, I would like to see leases for enough of the building to provide debt service coverage.

” Would this investment pay for itself in a reasonable amount of time? Maybe if I take into account current market rates for office space which is $18-20/sq ft (more for medical offices.)” Good, you have rates…. But you forgot to mention how big the building is or if you know what the operating expenses including taxes will be. If you do not know, you can assume 35% as operating expenses to get an estimate of Net Operating Income. You also can not assume that the building will get the higher end tenants, and if the rental rates were obtained from the broker, confirm them independently.

” Also my broker suspects that its value would grow appreciably” Make your decision based solely on cash flow. Do not count on appreciation.

” would a lender even touch this loan since there isn’t a rental history on the property, my medical practice would be new and this would be my first commercial real estate venture?” They would if there were leases in place, and you had the money to give a 20% or higher down payment. The fact that 25% of the space will be rented to a startup and your lack of experience is a concern.

” I’m still considering other options: such as purchasing a smaller and cheaper building, buying undeveloped land and building my own office or leasing some office space” There is no way that you can separate risk from reward. If I was starting my own practice, I would play it close to the vest unless my dad was named Dr. Koop, and I had the benefit of name recognition. On the other hand, you could very well strike it rich if you can somehow pull off the deal and rents in the neighborhood jump to $40 in a couple of years. You seem to have access to a considerable amount of money since you claim to have 10% down, I would be thinking working capital for my practice too. Do you think real estate is going to go up by double digit percentages next year? I don’t. This means to me that the possibility of relocating the practice from a leased office to your own will be there a year from now.

By then, you will have the extra down payment money, a business with one year of operations, and a lot more know how about what your practice can and can not afford as office space.

Good luck

/sometimes I feel like a dream killer sad.gif




Posted by: Cantcam Oct 29 2004, 02:01 PM
Thanks for the reply. You've confirmed my concerns and brought up some good points. Although my broker is a good guy, he's a bit optimistic at times. At this stage in my life and a career, I can't afford to take that risk. I also talked to a business consultant about this scenario. She suggested that I should just concentrate on getting my practice started and running instead of trying to juggle two business (the practice and the property) at the same time. Dream killer? No, you've probably done me more good by preventing a nightmare.

Thanks for the advice,

cantcam

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