Renting out one of my own Commercial Office Space Units??

Question

Commercial Real Estate Newbie question here!

I purchased a 7500sqft, 5-unit office building under an LLC that I use for my RE Investments. I purchased for 410K and the building appraises as-is at $520K. Current renters are paying way under market, and the building is U-G-L-Y.

Currently two units are rented out, and I'm moving my other LLC "day-job" into two of the units, and will be paying my RE Investment LLC rent. My plan is to refinance asap to get my down payment back out, just as soon as I finish sprucing up the place, raising rents, and finding one more tenant.

My question is: Can I raise the value of the property by charging myself the higher end of the rents for the area (which I don't think I'll be able to get for the other units)?? Example: If my other units are paying $13/sqft and I'm charging my other LLC business $19/sqft to raise the NOI, when it comes time to refinance, is the bank appraiser going to look at that and see that I am essentially renting from myself and charging myself a high rent, and therefore not honor the higher NOI for the appraisal??

Thanks for your help!

canton, georgia, woodstock, cherokee county, refinancing commercial, owner operator,

Bennet Sebastian · Answer

Your rent is most likely going to be adjusted down to market average. But better to be a little on the high side as they probably would not adjust upwards if the rent was below market.

J. Mitchell Bernier · Answer

@Jacki F. Unfortunately most times the appraiser will take out yours and just assign a market rent number or average rent number based off the other tenants. He/she will not use your own personal rent if it is not in line with the market or the building rents.

Good luck

Adam Ulm · Answer

Interesting thread and idea.

According to answers.uslegal.com an arm's length deal is one that is "which is freely entered into by parties who don't have a special relationship or control over one another."

My guess is that it will probably depend on how thorough the appraiser is.

Matthew Nicklin · Answer

Ronald I can't speak for Mark as I am not him and this is not my deal. I was just pointing out his experience. I know from watching some of his other content that he owns the shopping center with a partner, so unsure if both entities are disregarded entities, my guess is they are not.

Ronald Rohde · Answer

whats the tax structure? if both disregarded entities, you're in tough spot. Is the lease an arms length lease?

Matthew Nicklin · Answer

Great question! One I have actually thought about myself, as I was considering an office-hack at one time.

I was watching a video recently that was discussing commercial appraisals and a shopping strip center. It was by Mark Ferguson of InvestFourMore. He owns a shopping center and his RE Brokerage is a tenant in the center. He said his RE Brokerage was paying under market rent and it actually negatively effected his appraisal.

I think if they are all separate entities the appraiser is probably not going to look into it too much. Probably a question for a CPA or tax advisor to see how it may effect your taxes.

Devan Sprayberry · Answer

@Jacki F.  I don’t think I’ve seen something like this asked before.

I like the way you think about it but also I am very curious to see if any others have done something like this.

Ronald Rohde · Answer

Okay, thats all positive. I think per other comments, you won't get dinged down to 0, but maybe only down to average.

Jacki F. · Answer

@Ronald Rohde - My business that I'm moving into the commercial building is an S-Corp.  The building itself is under a separate LLC which will be on my personal tax returns- so I believe the LLC is a disregarded entity?  I'm not clear on what makes an arms lengths lease agreement, but I am charging the higher end of market rates, and the lease is the same as what I am using for my other tenants except for the higher rent.

Jacki F. · Answer

@Matthew Nicklin  Thanks! Yeah, I'm wondering if most appraisers would look so close to see that I owned one of the businesses renting from the building, especially if I'm using two completely separate LLCs with different names.  Good to hear that what I charge myself in rent may have an effect on the appraised value, always good to have more control!   I'll check out that youtube video- thanks again!

Renting out one of my own Commercial Office Space Units??

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