First commercial opporunity - interesting dynamic

[Jason Miller]

I'm looking at a deal that is relatively close to home. I run a consulting business that makes my money but by nature has no passive to residual income component - thats a whole other discussion ;). I'm interested in investing in commercial as a way to diversify a large tech-heavy equity portfolio and hedge against some market risk. I don't have a lot of time (due to my main business) which has kept me away from residential real estate for a long time until I started looking at commercial properties. This opportunity strikes me as a bit more hands off due to existing long-term tenant and a neighboring bank that appears to control the property, but it has a potential downside.

I am very interested in your opinion on this unique situation. I would be putting down around 400k on a property in the 1.5M price range which should easily get me to around 70-75% LTV.

It's a small stand alone strip mall-ish like building that has 5 units (1,400sq/ft a piece) which are attached to a 2,700 sq/ft bank on the end. The bank portion is not for the sale, everything else is for sale as a whole (the only other 5 units). Currently, 3 of the units were combined and occupied by a franchise gym and the other two were combined as a doctors office. So it's currently fully occupied. The purchase price is about $1,500,000, cap rate 8.40%, NOI $127,000. The building is very close to a large retailer that is a big draw to the area.

The property technically brings in about $180,000 in gross income. Both tenant leases appear to be NNN as ~55k of that $180,000 gross is CAM, (26k), Insurance (1k), Taxes (24k), and Management (5k). Therefore, the 55k is reimbursed (paid) by the two tenants (unless I understand that wrong). What is news to me is that the CAM fee (26k) is stated as paid to the bank that occupies the end of this building. It appears that there is an association that the bank owns over the property and required (when the place was built) that it forever be responsible for maintaining CAM and that the remaining for-sale property is responsible for reimbursement of CAM to the bank. This is likely because the bank needs to control the appearance heavily, snow removal, etc. This makes sense to me as a necessary precaution for any bank to avoid a connected property from turning into a dump. It is also my understanding that the bank may have built the entire building initially and used the other units to subsidies the cost before eventually selling them as a whole. Although, the CAM of 26k/year seems high to me, but I really don't have experience - I also don't see anywhere that excess is returned.

So while the CAM situation is odd, I do think there is large benefit to having the bank on the property as its a big draw, as is the gym. The lease on the gym runs through 2026 and appears to increase each year about 2k with 2 options for 5 year extensions. The lease on the doctor office runs through 2021 with an increase of about 1k each year. Ideally, I would replace the doctor office with my own business TBD in its place and leverage the other tenants to pay the loan. I like the fact that it is fully occupied (hands off for me), but I know it limits the appreciation due to lack of value-add. Ironically, I've also thought about opening up a gym (of the same franchise) so this is a double bonus for me to house the exact one. 

My strategy for this property would be to acquire a 5 yr fixed 20 year amort loan, ride it hands-off until the first lease expires on the doctor office, potentially kick them out and put my own deal in, or if they stay (after I crank up the rent) - I could wait however long until the bank leaves and likely sells the remaining share of the building to me. At that point, I would purchase it and have a nice value-add units 5-10 years down the line. If the bank leaves, the drive-thru and everything else is already setup as part of the building and likely re-purposed for fast food or whatever else could go in there.

Thoughts?