Posted by Ketch on July 14, 2004 at 13:39:22:
Hello again all,
I’ve come across a very interesting deal and I wanted to run it by you to see if I’m on track or if there is something more I could do here. What am I missing?
Here is the deal:
Commercial Building in downtown area of medium sized southern city.
Downtown area is undergoing a revitalization and beginning to boom.
Building is brick, in good shape (gorgeous federalist Colonial Design) in desirable area for professionals.
Window frames and door frames need work (architectural molded accents possibly)
Here is the strategy:
Building is assessed at $300,000
We can buy it at around $200,000 (owner is a friend and his wife wants him out of the biz… nothing more… nothing less.
Since the building is near the courthouse, we’re thinking about creating a “Law Offices” building for attorneys.
The building would contain ten (1200 sq ft) offices
We estimate that we can get at least $700 per month per unit (that would be lower than comps).
That would be $7,000 per month gross ($84,000 per year).
Subtract 40% as a conservative expense estimate (not including debt service), which yields $50,400 NOI and a cap rate of around 17 (roughly) 50,400 / $300k (includes 100k renovation costs)
The above estimate gives us an after renovation property value of around $650k (based on an 8% cap rate desired by most investors and banks these days. A bit less if they need a 9 cap.)
We estimate it will cost an additional $100k to hire an architect and contractor and have all the exterior and interior improvements done (this is a blind estimate only). (that would include: build out 10 offices to accommodate attorneys (partially complete), do light exterior landscaping, replace windows with molded colonial accents, a few other extras.
Here’s our challenge:
We want to structure the deal so that we have:
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The architectural plans done before we close the deal (preferrably by 3 different architects so we can choose)
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The offices leased before we close the deal to purchase the building (based on the plans and renderings)
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A construction loan in place based on the leases before we close the deal
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We want to have a 90-day window to close
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We want to have all our ducks in a row in 90 days!
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We want to have our tennants in no later than 150 days out.
Here’s where I’m stuck:
How do we convince 3 architects to do independent renderings on “spec” so that we can choose the best rendering? (kind of a “designer’s challenge” idea). Will architects do renderings in hopes of landing the job? Or will we have to pay each of the three up front? Is it normal for architects to wait until the property closes to get their payment once the plans have been accepted?
How do we then get the attorneys (tennants) to sign leases based on the renderings before we even start the project?(which we’ll need for the loan)
How do we tie up the property with an offer to purchase before we know the answers to the above question?
For me, this is a creative RE masterpiece if done correctly. Just wondering what some of you guys’ and gals’ thoughts are on this deal. I’m looking forward to the education this particular project has in store.
Feel free to ask me further questions if you need to. I’ll be standing by wanting to get this thing under contract asap.
Ketch