Artist studios with Office tennants

[Ash Patel]

Back in Feb '15 I purchased a beautiful 3 story brick office building.

Quick Facts:

Year built - 2007 - bank owned in 2009 - vacant for last 5 years

total sq ft - 10,000

Build cost - $800k

purchase price - $230k

Reno cost - $80k (sump pump caused flooding and interior finishes)

1st floor is finished small offices (300-500 sq ft)

2nd floor is white boxed

3rd floor is former hair salon (plumbing gutted) and white boxed

The building is in a sleepy town but is surrounded by areas that are booming just a few miles away.  I am a buy and hold investor and have experience in residential, mixed use and retail.  This was my first office building and its been very challenging to find a tenant.  I inherited a music school that occupies 500 sq ft and pays $600/month and they are the only tenant.  I am considering a few options:

commercial realtors that want an 18 month exclusive contract and I would have to provide several thousand in upfront marketing costs to help find tenants.  The benefit of this route is that they would try to find a single tenant to occupy at least 2 floors.  

Convert floors 2 and 3 to residential.  This would be easy to rent but very expensive to convert.  

Make floor 3 artists studios where we give away the space very cheap to various artist to work and showcase their wares.  Maybe once per month host an open house.  I'm thinking art gallery with wine and music.  My thoughts are this would help the building gain traction and bring in some revenue.  Maybe its wishful thinking but I think it would be cool to have office space in a building that is also an art studio.

I would love to hear any feedback you can offer.

Ash

[Christopher Telles]

Congrats on buying what seems to be a good value. Now, its time to start extracting that value.

Forget about the art gallery wine & cheese thing. If you want to due that then host something similar at your home. It'll have literally zero impact on you securing tenants.

As fare as converting the two upper floors into residential, I would say this might be the better option given its a sleepy town, and most sleepy towns have a difficult time filling commercial vacancies. 

It may come with an upfront capital cost, but the way to see if it makes sense is to compete an entire financial analysis of the asset. What would the NOI look like after you've rented the entire building? What capital cost would it take to get there? How does that added capital cost add/detract from the ROE across the investment?

The answers to these questions should help you see what might be the better option for this building. 

I'm unfamiliar with your marketplace, but an 18 month exclusive listing seems ridiculously long. Its not uncommon for some landlords to spend money on advertising, but in my experience that has only been from institutional type clients that had specific marketing initiatives they wanted to complete.

Have you interviewed several brokerages? For several thousands of dollars you could do an awful lot of marketing on your own.