Help setting up first Commercial Deal w/ seller financing

[Jonathan Long]

Can anyone tell me what is a good cap rate for a commercial building in Lakewood, OH? I would also like to know the fair market value for rent per square foot in the area. I’m new to commercial property investing, and it seems like the answer is always “it depends”. Really, I’m just looking for ballpark numbers, not an exact quote.

This is a mixed use building, total size is about 10,000 sq ft. 2,500 sq ft of office space, and 7,500 ft of warehouse / light industrial space. As it goes in the area, the building is a little shabby and run down, and could use a decent amount of cosmetic work, but appears to be structurally sound. It has a single tenant, who occupies the whole building. It is currently an off market deal, not listed by any broker, etc. I would like to approach the owner with an offer, but I’m not sure where to start.

I do know he had the building appraised in 2006, and the building was valued at $300k. Current taxes are $11,500 per year, and Insurance is $2,800. The current rent for the single tenant is seems low, $3,200 per month.

Now a couple of curveballs: I am the tenant (50% owner of the family business in the building), the owner is a distant relative, and he’s willing to talk about seller financing. Right now, he is trying to get an appraisal done on the building, but it is taking FOREVER. The main holdup is that he has a broker friend who is doing an appraisal for cheap. Before that, he needed to talk to his accountant but the accountant was busy because of the extended tax season.

Basically, I want to make an offer that is a win-win. I suspect I’m paying below market rent, and I appreciate the seller’s willingness to offer financing, but I also don’t want to over-pay for the building, especially since it needs some work. I’m also OK with raising the rent to myself to get it in line with whatever is the going rate. In fact, I’m assuming that’s the only way to make this deal work. But as long as I’m paying the rent to myself, it’s fine.

Any advice on how to put this deal together and be fair to both sides?

[Paul Moore]

Hi @Jonathan Long. The cap rate for a building like that is often between 6.5% and 8%. But deferred maintenance like roof, parking lot, and other big issues should be taken into account.

You should probably connect with a tax strategist because it might benefit your business overall to paying higher rent, get higher debt on the property, and have significant writeoffs through a cost segregation study.

Feel free to PM me if you would like to discuss it. Good luck!