First Office Building Purchase

[Morgan Wells]

Good morning, I have signed an LOI on an office building for the first time. If we close, it will be my first commercial property purchase as well. I am the only investor/owner of the deal. I have basically zero experience in this area, and would value the community's analysis of this deal, particularly from those with experience in these types of properties. Details below. Thank you in advance!

Location: Suburb of Minneapolis

Price: 590K. 

Building: Office built in 1952, brick construction. Total 14,000 sq feet. 7000 sq feet upper level, 7000 sq feet basement/garden. 

Tenants/Leases: Main tenant on upper level is paying 6200/month gross and takes the entire 7000 sq feet space. Lease expires in 3 years. Basement only has one tenant who is taking 1000 sq feet. He is paying 1200/month gross. Remaining space in basement is vacant. 

Operating costs: 21k in property taxes, 17k in gas/electric/sewer (owner pays), 2500 property insurance.  I don't know how much to budget for capex, maintenance, property management. What is typical operating cost/sq foot for a small office building?

Capital: I can put 30% down, and bank has mentioned they can offer 4% lock for 10 years, on a 20 year amortization schedule. 

Questions for community: 

1. Does this deal pass the smell test?

2. Obviously main upstairs tenant is crucial. If they leave, how difficult is it to lease out 6000 sq feet? Is it typically easier to divide the space and rent to 4 different tenants at 1500 sq feet each?

3. What are typical operating expenses for a small office building? How much should be reserved for roofs/hvac/larger capital items? 

4. Building is on a hill, so basement has several "garden view" small offices, of  200 to 600 sq feet each. Does anyone have experience renting out these type of spaces? 

5. Any other advice/guidance would be greatly appreciated. I feel a bit sheepish after writing this post, as i'm realizing how little I know about offices specifically or commercial real estate in general!

Thank you!

[Bob Norton]

@Morgan Wells I'll answer the CapEx question. You need to find out the age of each major system in the building to determine its remaining useful life. Then find out how much the replacement cost of each system will be. Replacement cost divided by remaining life in months will tell you how much you need to set aside each month to replace all the systems when you expect them to die. This is called a reserve study. You can Google "Reserve Study" to find some examples that you can use to model your analysis. Hope this helps.