First commercial deal

[Sumner Gaber]

Looking for advice on this deal as I have never done a commercial deal.

Property type: Mixed use condominium (nonconforming use variance) 1500 sqft beauty salon lease expires next year, they are asking for 4 year renewal, 500 sqft storage stable income long-term lease, parking revenue in a pool

Size: 2000 sqft

Purchase price : $600,000

NOI: $48,000 (7.5 cap, NNN)

Location: Honolulu, HI

Condition: Good, HVAC just replaced, needs $10k in improvements to flooring

I'm interested in the property because it's a high cap rate for downtown Honolulu. I live nearby and it's impossible to find anything over 5 cap locally unless there's some real problems.  I think this one is a bit higher due to the variance stated above (change in use would require a new variance from county, takes about 120days) and also the seller's personal circumstances. The location is great, although it's not visible from the street, inside of an apartment/office building complex.

Appreciate any thoughts from the community as this is my first post. Thank you!

[Roger Lin]

@Sumner Gaber: Congratulations on diversifying into CRE. I think you want to be careful. First, I would study the zoning ordinance for the property to understand the appropriate uses (permitted by-right use, special exception and secondary uses). Whether your tenant vacates next year or 5 years from now, you want to know your options and what sort of tenant you can backfill the space. The scenario where this plays an important role is if the permitted uses are ones that do not pay as well as the current "retail" type use. This may cause your NOI to drop and negatively affecting your CAP rate. Also, keep in mind that if the beauty salon is operating under a nonconforming use variance, once they leave, you might not be able to get another variance for another beauty salon tenant. This means your rent will be different as described previously and perhaps more costly, you will have to spend a lot of money to renovate the space for a less specialized use. So, I would really think if this property will really perform as you anticipate before pulling the trigger. Good luck!