Mixed Use With existing tenants - advice

[Joseph Walsh]

Hi all, 

I stumbled into a commercial mixed/use opportunity, but have no experience with commercial.  If you have the time, I would love some feedback on the deal, specifically my area's of concern with inheriting tenants.

Overview:  Mixed use with several 1 bed/studio apts, and 2 storefront spaces.  Current valuation based on local cap rates, and current rents is about 175K(per the bank I contacted about financing), purchase prices is ~120k  (I think I can get it for less.)  So, on paper, I have an "out" built in...however...this is a very rural area, so it could sit for a long time.

Additionally, on paper, it cash flows already with current tenants, and all expenses accounted for  ( 1 years worth of utils, taxes, etc. provided)  Plus room to move the residential up 10-15% over the next few years, and the retail are WAY below market, so more chance to move those up over the next 5.  On paper, it's a "can't mess up" deal.  the current owner got in a while ago, has some other businesses and it sounds like he just wants to pull his cash back out and focus on those other businesses  (land lording not his thing)

Now, here's the part I am unsure of.  All tenants are on month to month  (which is fine for the residential, I can deal with that), but SO ARE THE RETAIL.  and one is a 5 year resident and has established their business.  The other one is about a year plus.  This worries me, not sure why.   If I go forward:

- Do I need to go LLC, I do all my residential stuff in my own name, with appropriate umbrella insurance ( I know, ask your attorney, just want your "feel" )

- What about those month-to-month retail tenants?  Seems like they should be on a longer term lease, and if so, what kind?

- Currently, there is also a great deal of back end expense costs for the retails units that can be moved to the tenants eventually which is the first thing I plan to fix (shared utils, hate that), so I would incorporate that eventuality into any lease agreements.  I also want them to pay for any modifications/adjustments to the space they need for their business, subject to approval by me.

- Never done a commercial Loan, what to look for?  I've talked with a local bank I trust, and sounds like they are willing to help me out, but any advice is welcomed.  Due to the time to sell if required, I am pretty sure I want to avoid a balloon payment on the loan, my calcs assumed a higher payment with no balloon.

Again, thanks.  This would be a baby step for me, and a good one.  Longer term I have my eye on an Apartment complex in the area, and this would help me get there, and also a safer "learning" experience, I might just be over-thinking this.