What do I do with this property?

Question

Hi, I have a martial arts business with my family in Tennessee. We purchased a piece of commercial property last year. It is in a great location and we had plans of putting our own business on the lot in the future.

However, I would like to explore options for turning it into a cash flow property. It is about 1.5 acres and we need a 10,000sq. ft. building for our personal business. So, if we put our business on the property it would take up most of the space. The land is undeveloped at the moment.

We are just getting started in rental properties and are very new to investing in properties and real estate. I am looking for ideas and advice for increasing cash flow and using this piece of property to its fullest potential.

thank you in advance.

Keith

Frank Hinck · Answer

@Keith Olson

I’d definitely start with the city and determining the Highest & Best Use.    Find an architect, get plans, have 3 Commercial GCs bid it out.  Talk to a commercial broker to do a pro forma on commercial rents to see what your annual return could be.   Develop the maximum footprint, your business can be a tenant and you can lease the other space out.  You’ll get the development experience and then you can do that again & agin, financing it with the leverage from equity in building 1.      BBRRR. Buy Build Rent Refinance Repeat.

Dan Weber · Answer

Well, if you had a single story building that is 10,000 sq.ft. on a 1.5 acre lot, that leaves you with 55,000 sq.ft. to do something with. Take away some of that for parking and what not, you still could have 40,000 to work with. I would start by going to the town/city and exploring the zoning to see what types of uses are allowed in that zoning district. That will help you narrow down the decision.

Craig Baute · Answer

If it's in a great location with 10,000 square feet then you have several options. I'm coming at this from a different angle as a coworking space operator for the last 10 years. I have seen several clients turn 10,000 SF into office spaces with a coworking element. Some spaces also turn their spots in JVs with regional coworking operators. It usually fits the zoning code and is fairly easy to retrofit from retail to coworking.

I recently did a complete demo for a 7500 SF space between three retail units and combined them into one coworking space. It cost around $290,000 for the building, demo, buildout, HVAC, furniture, everything. It's held up during COVID and it's still generating $25k a month in revenue and has room to grow. The traditional LT lease on it is $14+7NNN. Overall, it's in an undesirable back end of a strip mall and sat empty for years.

Basically, if you're willing to be a little more entrepreneurial but want to reuse a lot of what you have then I think coworking is a good option. By doing a partnership you don't have to do it yourself.

Ronald Rohde · Answer

How do you own the property? Be sure to review your contracts, financing, etc.

Henry Clark · Answer

@Keith Olson

Couple of avenues along the same lines as above:

1.  The Martial Arts studio my son went to, had to move three times in the last 10 years due to unusual things.  I noted the Tropical Fish store followed him twice.  What I mean by this is you have other businesses who have customer basis or areas of town similar to yours.  As stated above build out as much as possible.

2.  If you construct from scratch talk with your CPA first. Ask him how he wants the expenditures to be segregated on the contractor billings.  Example:  Electrical, HVAC, Security system, Roads/Parking, etc.  He can write off some of these in year 1, giving you a tax/cash advantage.

3.  Also have him look at who should own it and how it should be owned.  He might recommend a Sale/leaseback or renting from a family member.  Trying for a tax advantage.

4.  Build for the future.  Watch out how you position the building on the property relative to street access and view.  Look at how your parking is done.  You might never want a drive through window, but a future owner might.  Etc.

5.  When it comes to the footprint, check with zoning on Setbacks, required landscaping and parking, need for Storm retention ponds, fire hydrants, sidewalks, water/sewer/gas easements,  etc.

What do I do with this property?

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