Should we rebuild a triplex?

[Carolyn Morales]

we are buying a 60x137 lot zoned CRO in a great spot. The buildings were demolished but slabs and utilities are still there. I am wondering  if it is a good idea to rebuild a triplex in today's construction market or try to convert it to a parking lot and lease it to the business next door? Any thoughts are appreciated for Jacksonville Florida area.

[Scott Choppin]

We would approach it like this, underwrite the income and expense model for:

1. Parking lot 

revenue (rents) - (minus) operating expenses (opex) = Net operating income divided by cap rate for parking lots in market = value - (minus) cost to build parking lot (pave, fence, light) = profit generated 

2. Triplex - 

revenue (rents) - operating expenses (opex) = Net operating income divided by cap rate for comparable apartments = value - cost to build (hard/construction costs + soft costs + development impact fees + misc (less credit for fee per above) = profit generated 

Two ways to compare (really three but we'll leave out IRR for now)

A. NOI/Cost = development cap rate, or the amount of NOI generated given costs of the project, compare the two ratios

or 

B. NOI/Market Cap Rate = value - less cost to build = development profit, compare the two profit amounts generated from the development of each projects

Easy to compare the two ratios or profit amounts and see what works better. You do need to take into account the following:

- How much capital you will need to do either scenario, the parking lot will take a lot less capital

- How much time you will need to do either, the parking lot will take a lot less time to build and start generating revenue.

- Zoning - does the zoning allow use as a parking lot? Obviously it used to be residential, but when torn down did it revert to some other zoning? In other words, did it used to be a legal non-conforming use? Maybe triplex is allowable, maybe not, need to check the present zoning for allowable uses.

General observation: 

Parking lot = low cost/low investment, lower cash flow, less stable source of cash flow, less available buyers for a parking lot (less buyers = less potential value). 

Apartments = higher cost/larger investment, larger cash flow, more stable source of cash flow, more buyers if you ever want to sell (more buyers = more potential value.

I am an offer of help if needed for further thinking and design for your projects.

Thanks.