Buying vs Building Commercial

[Jordan Pennington]

Hi everyone,

Looking for some advice on an interesting dilemma I have. So here is the story. 

I have owned and operated a few retail spaces in my town for over 30 years. I have been looking for a freestanding building for a few years as the rent for one of my retail spaces has ballooned due to the escalator clause in the lease. The landlord refuses to negotiate. Luckily about 5 months ago I found a piece of land nearby (0.35 acres), got a 1 year escrow period, and begin to go through the entitlement process with the city. The progress has been slow and I still have not been approved. My engineer and the city have told me I should be able to build about 3500 sqft on the property. I only need 1500 meaning I could use the other 2000 as a rental unit. A few days ago  an already built free standing building directly next to my land came to my attention. It is about 1300 sqft. I talked to the owner and he told me that he has been planning on retiring and listing the property. I told him to send me details, and he sent me an OM, but there was a catch, he would not sell the building without selling a 2 acre piece of completely undeveloped residential zoned land directly behind his retail building. This land is around a ton of housing so it is weird that it has never been developed but even so I have no interest in building housing.  I am thinking maybe I should still go for it and hold the land

So here is the outline

Scenario 1:

Buy land $240k for 0.35 acres

Build 3500 sqft for about 800k

Total of ~1,040000

Get one extra rental unit that rents out at about $2sft

So about $84000 in rent (my biz will pay rent to entity)

Payment will be about $6k with prop taxes as I am cashing out the land and just getting a construction loan. 

I have about 15k in sunk costs into the project already

Scenario 2

Buy existing building of 1300 sqft on 0.35 acres and an additional 2 acres of residential land for $750,000. Payment will be about $4.5k

I keep thinking I would be better off long term with the extra rental income from doing the construction, especially if I sell my biz.  if I just buy the existing there is no headache of doing ground up construction (I am a first timer), and I can move my business in to the space in the next few months realizing savings of rent of about 4K a month. The downside of buying the existing is finding someone to buy the residential land otherwise I have to hold and pay prop taxes.  

What do you guys think?