Seller Financed Office Building

[Juan Aguirre]

I am currently in contract on this office building. It was arranged on a 5 year interest only, seller financed, with a balloon payment at the end of the 5 years. This is my first office building, and I see tremendous upside on the property due to its location. The property is vacant and is fit for 1 tenant and can be converted to 2 (it is a 3,000 sqft building and has over 30 parking spaces). It is in a corner lot on a very busy Main Street. There is new retail development directly across the street from the subject property that has been approved by the city and construction starts October 2023. This is my first venture into office space and would love for the community to look over my numbers and to see if passes the smell test and what pitfalls I should look out for. 

Purchase Price- 360,000

Down Payment- 30,000

Interest- 5.7%

Interest fee- $90,837 and $1,567/m

Balloon Payment in 5 years- $330,000

Total paid for property- $450,837

Total  Fees (Interest, Taxes, Insurance)- $28,608 and $2,384/m

Income at $15/sqft (very conservative in my market)- $45,000 and $3,750/m

Profits- $16,392 and $1,366/m

NOI- $29,500

The property is currently vacant and it is a 1 tenant office building. I understand the risk that comes with that, and I feel that the numbers and the upside of the deal make up for it. Office space tends to get leased out on average 3-6 months in my market. Also the interior of the property needs a lot of updating, What has been your experience with Tenant Improvement? I expect my tenant to do the updating themselves in return I would give them a couple months of free or discounted rent. My exit strategy would be to refinance and pay off the ballon payment, or sell the property depending on what the returns look like. 

Thank you for your input BP I am excited on what is to come and I will keep you guys updated through this journey!

[Scott E.]

Your numbers all sound good to me, but a few notes...

1. You're running the numbers based on an interest-only loan. I'd want to make sure the deal still cash flows to your liking with a fully amortized loan.

2. You're expecting the tenants pay for TI for a little free rent. In my experience, you might need to be paying for some or all of the TI. But in exchange for you paying for improvements, the tenant should be signing a long lease at a rent rate that is aligned with the improved property.

3. If space typically gets leased in 3-6 months in your market, I'd budget for 12 months of vacancy.

4. You're not accounting for closing costs and attorney fees. This is your first office building. You should have a real estate attorney involved to review all of the paperwork with you.