First Commercial Deal

[Lucas Carroll]

Hi,

I've owned a multi-family for about 9 years now and I have an opportunity to purchase a commercial building. This is my first foray into commerical real estate and I'm not really familiar with the additional concerns. I've spoken with the owner, had the building assessed and gone back and forth a bit on price. It is currently largely unleased, it hasn't been maintained very well and definitely has some things that need work. I've included the details of the deal below. So, any feedback on the deal itself, especially pointers on putting together a pro forma to bring to financing agency would be great. My credit is excellent and I'm planning in putting about 80k equity in.

The deal

1. Location: Town Center of middle-class suburban neighborhood 
2. 5,750 sq foot retail (3350 1st Floor; 2400 2nd Floor)
3. Assessed 265k
4. Purchase Price 200k (Loan for 300k)

Current Situation

First Floor (3350 sq ft)

1. Unit 1-3: 2150 sq ft (Unleased - 1 definite tenant, 1 possible tenant lined up @ $13/sq ft)
2. Unit 4: 1200 sq ft (Leased @ $13/sq ft)

Second Floor (2400 sq ft)

1. Units 1-3: 1100 sq ft Leased @ $6/sq ft (storage)
2. Units 4-7: 1300 sq ft (Unleased)
3. Basement (3350 sq ft) Unfinished Concrete

The assessment revealed some minor issues and a few not so minor issues.

1. Foundation - split between current owner and myself estimated @ 8k each
2. Septic - estimated @ 30k
3. Buried Oil Tank - Current owner will remove prior to purchase

Improvements:

Planning to convert 2nd floor to residential (2x 2 bdrm apts) estimated @ 45k

I'm planning on spreading the major costs over the first 2 years and I'm assuming 5% Vacancy, 5% Maintenance, 3% Management, 2% general utilities (water/common area electric). Based on that, this is what my first few years of numbers look like.  If everything goes well, I'm looking at 15% cap rate starting year 3.  Up to date retail space in the area goes for $12-18/sq ft.

Thanks in advance,

Lucas