Owner Occupied Commercial Construction

[NA NA]

Hi everyone,

I have a service business located in a large shopping center anchored by a major grocery chain in California. I have owned the business for over 30 years, and due to escalator clauses in my lease, my rent is slowly becoming unaffordable (I am currently paying $6000 a month for 1700sqft). The landlord refuses to negotiate, but has allowed me to stay month to month. There is a piece of commercial land for sale right down the street, which is the only undeveloped commercial land in the area. The land is only about 0.35 Acres (15,000 sqft), but provides for frontage on a very busy street. Right next door to the land is a 5 unit commercial center filled with service businesses (Barber shop, UPS, etc.)  I went to the city, and they told me that I can build about 3500 sqft on the lot. After speaking to the broker and some negotiation, the broker offered me the land for $240,000 (originally was listed at $315,000). As a comp, a piece further down the street that was sold last year which is about 10,000 sqft bigger, and has since been developed into a two story medical office space, was sold for $320,000. Apparently, the owner of the land is in bad health, and her heirs are looking to unload it quickly (the land has been for sale for over 10 years). 

I have experience with buying commercial real estate (mainly in the hospitality/lodging industry) but I have never done any ground up development.  My thinking is that I can build 3 units and occupy one. I would cash out the land use it as a down payment, and build out using a construction loan. I have a strong relationship with a regional bank that has loaned to my partners and I for my hospitality properties, and they will likely apporve the loan. 

My questions are, What are some of the headaches involved with construction? I am a complete newbie and want to know the task I am taking on. How hard is it to do an owner build (I use someone elses license and sub work out)? Also is this a deal worth pursuing in your opinion? These are my numbers from my spreadsheet assuming market rents (including my rent from my business):

Total Cost of project: 1,003,300 with construction contingency 10%, closing, land, and loan fees

Borrower injection:$351,155

Loan Funds: 652,145

Monthly Payment(with prop tax/insurance): 5542

Market rental income: 94,500

Vacancy 5%: 4725

NOI: 89,775

Debt Service Plus Prop tax: 66,456

Cash Flow: 23,270

Cash on Cash year 1 6.6 Percent.

Thanks for reading!