What to do about that vacant commercial space

Question

If you were to pick up a small building with a few residential units and a nice sized commercial store front on the first floor how would you handle getting that store front ready to rent? What is the most common practice if the space is in major disrepair? Would you complete gut-renovate it with your own resources or is it more common to let an incoming business do it?

Les Jean-Pierre · Answer

Just as an FYI, my tenants sub-metered the water, put in new floors, upgraded the bathroom, brought more electrical power to the building, new wiring, lighting, a split hvac unit, a water heater, and baseboard heating, new floor. They took the space to a new level and I only traded three months of free rent for it. It is completely separate in terms of utilities. They made upgrades I never would have and they still are paying rent.

Jordan Blit · Answer

This is a lot of great info. Thanks so much @Les Jean-Pierre and @John Hickey. I was thinking if I could get a few friends together to pick up this building in bushwick on bankruptcy auction tomorrow it could work out nicely. It sounds like making the commercial space work wouldn't be too terrible given your advice. I saw one of the apartments though. They are fairly recently renovated but the work is not good at all. At this point that is more of a concern. The tub in the bathroom was pitched about 5-10 degrees down towards the wall. I could just imagine what was going on behind the walls. Yikes.

I think I will go to the auction for the experience but I might have to pass this one up. I may be more inclined to gather troops and act on the next one that pops up though.

Les Jean-Pierre · Answer

Also, look at loopnet for what is renting and the condition. You might want to call the utilities to see if they will give any free upgrades too.

Les Jean-Pierre · Answer

The space was ok. It was "renovated" in 2008 by us. We had an electrical violation and had to fix that and then we decided to fix it up. So, you had normal VCT tile, some new lighting and a decent bathroom. I would say if you were going to start an office or store, you could just paint it and be set. The store was functional.

We had two real restaurants interested and we actually got into lease negotiations with them but both fell apart. But, they would have fixed up the place on their dime. One guy showed me one of his restaurants and he dropped a lot of money into it. Because my dad bought the building a long time ago, you were looking at improvement budgets that were more than he paid for the place.

I did not see your response before my second post. So, individually metered is good. I agree with what John said. Clean it and make it look good. I had a horrible basement and over the years I cleaned it up and had a guy drylok the walls and painted the floors. People liked it a lot. I did it because I was thinking of renting out the basement as storage. I still might but it had a collateral effect of making the place look better. But, other than slight cosmetic stuff, you shouldn't be paying for jack.

As far as restaurants, I only bring it up because you will get a call from your broker and they might ask you if you are open to a restaurant with a vent. If you aren't fine. Your decision. This coffee shop is only making coffee, drinks and pressed sandwiches. It is not as intrusive as a real restaurant. If someone wanted to open a space with a dry use, you would only have to cover some pipes. I was not too keen on restaurants but the space was sitting there for a while.

I was seeing people wanting to get into ten year leases with five year renewals. So, dropping $100k is not seen as an outrageous expense. They know they have to pay for fix ups.

We are in East Bed Stuy near Broadway. The commercial and residential market is changing daily.

I leaned on my broker a lot and asked him what was commercially reasonable. Same for my lawyer. Helps out a lot having good people. Commercial leases are heavily slanted towards landlords.

Finally, you have to look at the experience of the potential tenant. Do they know what they are doing? How much cash do they have? Does the store make sense for the area? Are they pains to deal with? After these three lease negotiations, I have learned a lot.

Jordan Blit · Answer

Wow that sounds pretty fantastic. What was the condition before they came in? May I ask what general Neighborhood in Brooklyn?

Jordan Blit · Answer

Thanks Les—This is about what I thought.

In this particular case the space would be leased out. There is a basement that they could use for storage if needed (the basement looks as you would expect a BK mixed use to look, pretty gnarly but functional).  I'd say the area is "up and coming." Everything is individually metered.

The commercial space is pretty bad looking. I would say it needs to be gutted, but maybe just plumbing and walls is enough to get someone in there to polish it up. I guess that's what I get hung up on. Would I want to re-build the bathrooms only to have a restaurant come in willing to pay to have them moved somewhere else?

I may take you up down the line on that offline discussion.

Les Jean-Pierre · Answer

Hi, my family owns a mixed use in Brooklyn. We signed a lease with a coffee shop a few months ago. Normally, the tenant does all the improvements at their own cost. The landlord gives some free rent at the beginning of the lease. But, I guess some questions first: 1. Do you want to allow a restaurant to lease the space? 2. Is the space in an attractive area?

Mind you, if the space is in major disrepair, that might turnoff some tenants because they see a huge build out. Depending on where it is, maybe clean it out, paint it and call it a day so that at least it looks good on the listings. But, depending on the length of the lease and the business owner, they might feel it is ok to invest a lot of money. Is the space separately metered? How is the basement? Depending on the use, the tenant might want some of the basement as well.

But, the landlord comes out ahead in most cases. The risk is mostly on the tenant. If they go under, you keep the improvements. I would say the biggest risk to you is if you get shoddy construction.

We can discuss offline if you like too.

What to do about that vacant commercial space

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