Posted by ray @lcorn on January 08, 2004 at 09:30:58:
Reva,
Glad to help… that’s what this board is all about.
My next scheduled speaking gig is at the CRE Convention in Atlanta in March. See http://www.creonline.com/convention/2004.html for details.
I’ll be doing a four hour workshop on commercial real estate on March 25, the day before the full convention starts. The link for the full description of the workshop is http://www.creonline.com/convention/2004-3.html
Hope to see you there!
ray
Is this a good deal?? - Posted by Chills
Posted by Chills on January 06, 2004 at 18:43:44:
5,800+ square foot of Restaraunt/Bar and 12 residential units. Has a new roof air conditioning, fire stairs, and elevator (6 levels).
The Bar/Restaraunt is currently leased out until 12/31/08. At a base rent of $18,100.
All 12 units are occupied with tenants paying a collective total of $12,000 per month.
The estimated expenses are $6,390 per month.
The price is $4,000,000. With 40% (1,600,000) down. The assumable debt is $2,400,000 @ 5%.
The building is located in the heart of the Gaslamp Quarter in Downtown San Diego. The building itself was built in 1888. There is possible Historic Renovation and tax credits. They say there is a 7.5% CAP on Actual Income.
Would really like to hear some opinions.
Re: Is this a good deal?? - Posted by ray @lcorn
Posted by ray @lcorn on January 06, 2004 at 19:32:39:
Chills,
I usually think of “good deal” and “restaurant” in the same sentence as being an oxymoron, but maybe this is the one that makes sense… some questions…
What is the amortization period for the existing loan? Loan term? assumption fees?
The restaurant rent $18,100 per month? That’s one helluva restaurant. How long have they been there?
The expenses sound low even on a per unit basis. Are the expenses broken down? Does that include property taxes, insurance, utilities and maintenance? Who supplies HVAC? Perhaps the restaurant pays its own expenses?
Better check with an expert on the historic tax credits. If the renovations weren’t fully documented the credits will not be issued.
ray
Ray, more about restaurants PLEASE - Posted by Reva
Posted by Reva on January 06, 2004 at 21:59:14:
Do you think one should stay away from restaurants? I have an office building that I think would make a better restaurant. It’s riverfront and within walking distance of thousands of folks. I found out today that lenders typically go only 50% of appraised value on loans for restaurants. Why? It was interesting to read your comment after talking with the lender today. So, more of your thoughts please!
Re: Ray, more about restaurants PLEASE - Posted by ray @lcorn
Posted by ray @lcorn on January 07, 2004 at 12:08:42:
Reva,
I’ve got a built in bias against restaurants for several reasons.
First, as a business there is absolutely no barrier to entry for competition. Today’s hot spot is tomorrow’s ghost town with the addition of a new restaurant on the next corner. They are easy to start, easy to fail, and there always seems to be another person to take up the dream of owning a restaurant. Profit margins are razor thin at best, and its the only business I know that of the two major expense categories, labor and food cost, one can drive the other higher through, waste, theft or consumption.
Second, as a landlord a restaurant can be a pain in the rear as a tenant. They produce mountains of smelly and messy waste… traffic and parking can be a problem at mealtimes, especially in a mixed use strip center or building… inspectors, competition and public opinion can change the financials overnight… all this equates to them being a higher risk tenant than other uses.
All that said, I’ll admit we currently own two restaurant properties, and have owned others in the past. I don’t go looking for them… we own these because of having other interests in adjacent properties. I have friends that have made millions in the restaurant business, but I tried owning a franchised operation and quickly found that I’m not the type. It’s too hands on for me, and I am more comfortable being the landlord for the guys that like doing it.
I won’t say stay away from them, but I do recommend going in with eyes wide open as to the risks and realities of the business type. In my opinion, an investment that requires higher risk and more effort on my part can only be justified if I can achieve a higher return. The risks can be mitigated somewhat with personal guarantees, tight lease clauses for maintenance and performance issues, and the right mix of tenants if it is a multi-tenant property.
ray
Thanks, Ray. Restaurant or lofts? - Posted by Reva
Posted by Reva on January 07, 2004 at 21:33:30:
Thank you for that insight on the restaurant tenant. This is my first commercial property and I thought a restaurant would be great because the area needs one and the building is waterfront. Right now, a small post office rents 2000 sq ft of the 6000 sq ft. It closes at 1 PM and there is lots of parking.
But now, you have me thinking a bit harder and consider other options. What do you think about adding 4 units of 1500 sq ft for two bedroom/2 bath apartments? My plans are to go up and increase the sq. footage to gain more cash flow. Restaurant or lofts? What do you think?
Re: Thanks, Ray. Restaurant or lofts? - Posted by ray @lcorn
Posted by ray @lcorn on January 08, 2004 at 08:08:05:
Reva,
I don’t know your market so it is hard to say what the highest and best use for the property may be. Mixed use buildings are almost always unique. Many downtown areas actively promote conversions of commercial buildings to residential use, but that isn’t always the best use for the property. The key is to find the balance that works in the specific market.
Spend some time doing a little research… compare market rents for residential units and commercial space; take a look at the neighborhood and determine where the greatest demand is and which type would be better suited to the site; talk with the planning and zoning folks and see what the maximum density of the different types will yield in the way of building size, number of units, lot coverage ratio, etc. Then tally up the relative costs of doing each type of improvement and run the numbers based on the expected market rents. Many times those numbers will make the decision for you.
And again, don’t rule out a restaurant completely. Your hunch may be right on target. Just go into it with knowledge of the drawbacks as well as the advantages, and adjust rents, costs and returns accordingly. One way to ease the owner’s expense burden of converting a building to restaurant use is to offer the restaurant space as-is at at reduced rent to market, and let the tenant make the necessary improvements, subject to your review and approval of the alterations, finish schedules and construction quality.
ray
p.s. Also, review the lease for the post office for any restrictions on the use of the rest of the building. I’ve seen some onerous clauses in government leases regarding compatible use restrictions, parking and access.
Ray, you have been tremendously helpful - Posted by Reva
Posted by Reva on January 08, 2004 at 08:41:03:
Thank you so much for the food for thought. I will do just what you have indicated; study, run number, and plan. It is piece of property and could actually fund my retirement - if I don’t ruin things. I hope to meet you at a conference or seminar. Are you attending or conducting a session soon - anywhere?