Need Help Access an Off Market Commercial Deal

[Neel Patel]

I have gotten an off-market Commercial Deal to me for $550K. The property consists of 3 front units touching the highway with good traffic. One residential unit is attached in the back, around 700 sqft. The total size of the building is around 4800 sqft. 

The seller is open to doing seller finance at 5% INTEREST only or P & I. The INTEREST-only payment would be $1460/m with a $200K downpayment. The loan will be due end of the 5th year. I am planning on holding this long term for appreciation. 

The seller has replaced the roof last year. All the expenses inside the building are the tenant's responsibility except for the apartment. I have the option to increase the rent on Unit 1, Unit 2, and Unit 4. They are month-to-month leases. I plan on putting CAM on the tenants.  The current rents are well below market rents. 

The location of this property is north of Huntsville. This is not located in the immediate appreciation area but it has the potential to appreciate in the longer run. 

Following is the income for all the units

	Rents	New Rents		Expenses
Unit 1: 1800 sqft	$ 975.00	$ 1600		Insurance	$ 6,000.00
Unit 2: 1100 sqft	$ 900.00	$ 1100		Taxes	$ 2,728.00
Unit 3:  1100 sqft	$ 925.00	$ 1050		Sewer Charges	$ 4,800.00
Unit 4(Apartment): 700 sqft	$ 700.00	$ 850		Vacancy	$ 4,000.00
Total	$ 3,600.00	$ 4,600.00		Repairs	$ 2,000.00
Yearly Revenue	$ 43,200.00	$ 55,200.00		Total	$ 19,528.00
Mortgage Interest Only/m	$1,460.00	$1,460.00
Mortgage Interest Only/y	$17,520.00	$17,520.00
	Current Income	Projected Income
Net Operating In	$ 23,672.00	$ 35,672.00
Cap Rate	4.30%	6.49%
Cash Flow With Int Only	$ 6,152.00	$ 18,152.00
Cash invested	$200,000.00	$200,000.00
COC	3.08%	9.08%

What are your thoughts on this deal? Anything I am missing? 

[Henry Clark]

1.  Your net operating income should have changed more due to the CAMS of $19,528.

2. You're increasing the rent, but also adding CAM of $19,528; plus, NNN other costs. How sensitive are those Renter types?

3.  Do some failure or sensitivity analysis.

a.  Assume xx months of lost occupancy.  Right now, your assuming 100% occupancy.

b. Run your COC with Principal and Interest, since you're looking at this from a long-term standpoint.

c.  Switch your interest rate to 8% and run both your current 5 years and after your 5 year balloon period.  Validate your financial metrics again.  Don't do the deal just for an Interest only loan.

4.  What are the quality of your clients?  

5.  When they leave, what is your conversion costs or build out costs for upgrading.  Need to factor in an assumption.  

6.  Run the numbers doing a Commercial Loan with 25% down and interest rate of 7.5% and compare against your Interest only loan of 5%.  a.  What is the difference in cashflow P/I versus I?, b.  What is your opportunity cost of the Downpayment difference, do you have other deals you could be doing?  The interest only looks great, but I would still run the numbers and see the difference.