Purchase mixed-use building with a partner in San Francisco

[Filomena Bettencourt]

Hi BP! This is my first first post ;) I'll try to keep this short. Keep in mind I'm a newbie to real estate!

I have a small business (hair salon) that resides in a mixed use building. 1 empty residential on top /1 commercial business on ground level (no garage). The upstairs unit is a 3bdrm/1bth, approx. 1500 sq ft w/ a back yard. 

The landlords acquired the building as an inheritance. As a stipulation to their inheritance their mother had to live in the upstairs until her passing; their mother just passed away. They want to sell and offered me first right of refusal. It's off-market and they have 2 other interested buyers. I'd love to purchase the building; unfortunately I can't do it on my own. I need a partner to help with the down payment.

I've already started a conversation and started the initial process (giving personal financials) with a commercial lending  bank, we'd be securing a 504 SBA loan. My CPA has been a great resource. I also had a 30min consult with a real estate lawyer. 

Do you think it's a good investment in partnering with someone that would like to purchase the building with me; they would reside in the upstairs unit and I would occupy the commercial space? If we partner,  would it be wise to separate the building into 1 condo and 1 commercial space later down the road? As a business owner, I want to secure my lease/rent. However, do you think this could be clouding my desire to purchase the building? What am I not seeing/asking?

Thank you!

[Amit M.]

@Filomena Bettencourt I need to know the deets before I can advise. Location, price for bldg, size of both units, etc.

Basically it’s sort of good news, bad news: The good news is that you guys could condo convert, as long as upstairs owner lives in the unit for a year, and then you guys automatically qualify and can go through the condo conversion process. So you’d each end up with a single condo which you could hold separate title to and (theoretically) refinance on your own.

The bad news: while the top owner would end up with a normal residential condo (and quite common in SF), you would end up with a bit of a white elephant ;) The reason being is that I’d be 1- hard to refinance and 2- sell in the future. You could NOT get a regular bank loan (residential.) you would need a commercial loan, and doing one on a single unit in a 2 unit bldg is NOT COMMON. I’d check this out with a good mortgage broker.

Sooo...you’d better get one hell of a deal on the commercial space, or I’d just push to negotiate a good long term lease with (existing) owners (who may feel some emotional obligation to do so) and call it a day. 

I’d research this very carefully, talk with lenders and RE agents who know commercial spaces and your area for their opinions before pursuing. 

And update us here on what you find out, for further input!

Good luck.