Help! Better to have a vacant building or a few tenants with 50% vacancy?

Question

Hello,

I’m reaching out regarding a unique listing: an 11,000 sq ft historic building located just one hour north of Atlanta in North Georgia. The property features two 1,400 sq ft suites on the main level (one currently leased) and over 3,000 sq ft on the upper level, with 750 sq ft already occupied, 3 small office spaces (+/- 250 sq ft each), and a basement tenant with 1,400 sq ft of storage space.

The building generates $6,000 in monthly gross income from its five tenants, but with full occupancy and market-rate rents, it has the potential to bring in $10,000+ per month.

Given its historical significance, stunning architectural details, and location, I’m curious about your opinion: Would this property be more marketable for sale with or without the current tenants?

Additionally, the owner is considering design plans to convert part of the upstairs into three apartments, adding further value and flexibility.

I’d love to hear your thoughts.

Evan Polaski · Answer

@Margot Weatherford, I would talk to local brokers.  There is value in each: if an owner occupant is your buyer, they will likely want it vacant.  But only Brokers will know how many of those are really floating around in your market and for that size asset.

There are likely more investors that will want the cash flow as a landlord, so in that case selling with some tenants, but also room for the investor to finish lease up to help their overall return would be beneficial.

Back to my opening statement, investment sales brokers would be able to give you better guidance. I would talk to several to get their opinion.  I would also talk to leasing brokers for this type of property to understand if there is real appetite from tenants for this type of building, as even if it doesn't directly impact your approach, it will give you some insights into how a potential buyer may be looking at it.

Josh Bowser · Answer

Margot - I would love to chat with you on this particular property. I'm based out of Kennesaw - myself and a few partners would love to take a look at this and AT LEAST give you our thoughts after looking at the numbers and leases.

Gabriel Graumann · Answer

@Margot Weatherford current NOI trumps potential every day, and is the best indicator of where the market is for the asset. Why isn't the property currently 100% occupied? What is the historical occupancy? If the seller is considering a change of use, why? Likely due to low occupancy and the perception a different use has more demand. However, mixed-use properties can create new issues depending on the construction and structure, access, and tenant mix. I've witnessed several "historic" buildings try the residential above and office/retail below and have major tenancy issues. Noise and smells, hours of operation, and access issues are very common, and many commercial tenants have conflicting needs with residential. Based on the size of the building, it sounds like an older residential building that has converted back and forth several times over the years, making it more likely to encounter the issues mentioned above. I stay away from historical buildings in general for all of the above reasons and more, unless it's a larger scale commercial building with concrete floors and great "bones" that can separate the uses/tenants better.

Gino Barbaro · Answer

@Margot Weatherford

If I am looking to purchase this deal, I want to look at in place NOI, because that's what I am going to be able to lend on.

I do not want to pay for potential. I would think it would be better to lease up the space if you can. The value in this type of commercial is in the leases.

If you can get approvals for the apartments, there is value in that. When I hear of historical significance, I think of an old building with significant cap ex, and functional obsolescence. A good broker can create a narrative or story to help sell the building, but as debt continues to pull back, in my opinion, it will be more challenging to finance.

Gino

Margot Weatherford · Answer

Thank you for your responses.

Yes, the current NOI would yield a 5.7% cap rate. Not ideal, but the current owner has had health issues that have deterred from fully leasing the building. So it has incredible upside.

Michael K Gallagher · Answer

From a buyer's perspective if they are willing to sell based on the current compressed NOI and incomes then you are likely getting a decent deal once stabilized.  but if they want the premium price like its full then its likely not worth it.

Help! Better to have a vacant building or a few tenants with 50% vacancy?

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