Commercial Property Refinancing

[Chris C.]

My wife and I spent 3 years looking for the right deal. Through proper planning we were able to close on our first mixed use commercial property. The property is vacant and in need of renovations (all of which is accounted for through a construction budget). The property is a two story, 8,000 sqft building including a 1,500 sqft barn (which will be coming down). The seller also owns a multifamily property next door, which we worked into the deal to have a (2) two year first right to buy/offer option. This will provide 35 parking spaces once the house is demolished. The transaction was seller financed which reflects 3 points over prime and a monthly mortgage of $1,714. We secured the property by providing 20% down ($60,000) as the property cost was negotiated to $300,000. The current balance is $238,000. My question is, can we refinance the property with a bank for a traditional loan? If so, will that impact our application for a construction loan?

[Keegan MacNichol]

It probably depends on your income, current debt, and type of loan you're applying for. You mention a construction budget but later a construction loan; do you not have the money to redevelop the property on hand? Might be tough to secure additional debt on a vacant property that doesn't produce income. How much will it take to redevelop the property? Once the property is stabilized/income producing refinancing to a traditional loan shouldn't be an issue though. Talk to local lenders and see what they can do for you. Might be that you get a short term bridge/construction loan and refi after the property is stabilized? 

[Chris C.]

Correct, we do not have enough cash on hand to put down to start the construction. Our construction budget comes to $1.2M to renovate the existing building, demolish the barn and the multifamily to create parking. We are looking to include the $240,000 to pay off the seller financing on the 8,000 sqft building and another $200,000 to buy out the multifamily. We are looking at a construction loan for $1.64M. Knowing that we need 50% occupancy through LOI, we are working with a commercial broker who is showing the property to a number of large franchises looking for space. $410,000 is needed in cash (25% down against the $1.64M). Since that number might take some time to get through private investors, I was thinking that if we can at least finance the 8,000 sqft building through a traditional loan it would provide us time to evaluate all of our options. The loan would be for $240,000. Since we paid the $60,000 in cash, we should have 20% equity using the purchase price of $300,000 as the assessed value since it has only been 4 months from the date of purchase.

Thank you for your advice, I will look into a short term bridge/construction loan and what the overall process is.

[Ronald Rohde]

Where is it located? growing economy?

[Dale Ferrell]

Can you service the $240K loan? What's the ARV on the building? What is the expected revenue from leases?

[Chris C.]

Update: 

After speaking with some amazing professionals who I have recently met on the bigger pockets forum, we have decided to stick with a bridge to perm loan. We have teamed up with a local commercial broker who understands our market in Connecticut and may have found an interested brewery who is looking to expand to a larger facility. We are hoping to have LOI's in place within the next 2-3 months which would reflect a 10 year lease commitment. Once the LOI's are in hand, we can begin to shop loan rates and then provide an investment package to begin raising the needed 20-25% cash needed to begin the work and to cover the interest only payments.

Estimated Gross Revenue would be $224,000 ($28/sqft at 8,000 sqft).  We are forecasting to have an annual net return (less mortgage, utilities and general prop maint) of $85k.  We will use the net rev to pay back our investors for the first two years.  Year three we would like to refinance the property and pay the balance due investors through the equity plus get a lower int rate for the property.   

[Chris C.]

Update 10/29/18:

With the building having a 4 1/2' x 121' sign board running across the middle facing the MTA train tracks and a microbrewery, we are working on having the town approve OOH advertising for a short period of time (6-9 months). We have already lined up a printer and advertising company who can help assist selling (16) sixteen 4’ x 6’ signs.Their pricing model is an initial $120.00 per sign (one time cost to make it) and then 20% commission of the total list price from the clients that they find us.We would sell 3 month bundles.

If we can achieve this initiative then we can cover the cost of the monthly mortgage, insurance and the quarterly taxes without being out of pocket. Any profit that is left over will go into our non-for-profit charity – Neighbors Help Neighbors (based in Bethel, CT).