[Calc Review] Help me analyze this deal- Commercial mixed use

[Jeff Borrelli]

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*This link comes directly from our calculators, based on information input by the member who posted.

I am in a negotiation to acquire a mixed use building in the suburbs of Chicago.
This is my first mixed use building, I own 3 2-flats and used to own a
single family I rented out but now am living in myself.

The
property I am trying to acquire has 2 restaurant spaces on the first
floor, (only 1 kitchen), and 4 apartments on the second floor, (1-2bed
and 3 1-bed). The restaurant spaces were gutted for a particular
restaurant group who was going to build to their concept. They ran new
plumbing all around, HVAC, sprinkler work and did a lot of behind the
scenes stuff like fortifying the ceiling, moving a stair case etc. I
have partners in the deal who run restaurants so we would open 1 LLC for
the building and a separate for the restaurant space. However, the
restaurant spaces will need a few hundred thousand dollars to get them
finished and open.

The property is a very high traffic A+ area/historic building.

Here are the general specs. Negotiations are in the $1.2-1.3 million range;
conventional financing with 25% down and financing 75%. Right now,
apartments rent for a total of $5200/month and ultimately we expect to
raise those and with the performing restaurants, a total monthly income
of $17-18k gross. I ran it through the biggerpockets calculator and I
show that if we can get the total building rent to $18k, we would have
to put $300k down, probably another $100k to update it enough for the
restaurant to pick up part of the tab for their concept:

Does this sound like a terrible idea or a decent deal? IF we weren't going
to open one of the restaurant spaces ourselves, I would have a tough
time thinking this is a good deal but I'm open to any advice on
valuation, (I have no idea how to value the property. The building was
purchased 2 years ago for $1.1M, the group put probably $250k into it,
(which doesn't necessarily all benefit our concept), and now we're close
to closing and just want some verification on this deal or not.

Thanks!
Jeff

[Brad Hayden]

@Jeff Borrelli -- I think you may have jumped ahead in your analysis. The stabilized end value is one thing, but the big question is … what will it take to get there?

The restaurant space is vacant, not producing any income and will need "a few hundred thousand dollars to get them finished ond open".
Currently you only have $5200 in monthly income -- not $18000. You will have negative cash-flow until the restaurant space starts producing revenue. How long will this take and how much will it cost to carry?
Based on these factors, you will not be able to get 75% LTV permanent financing. You're likely looking at a short-term bridge loan at 70-80% of the total project cost (acquisition, due diligence, financing costs, closing & title costs, restaurant finishing, carrying costs, etc). The lender may require you to bring extra capital into the deal for interest reserves.
Will the market support raising apartment rental rates?
Property taxes will be re-assessed and will likely increase after the sale
Insurance amount seems very low
Lenders will require some economic vacancy factor in underwriting
Many lenders consider mixed-use that is under 50% residential to be high risk

it might be a good deal, but I would want to see a line-item monthly cash-flow analysis for the duration of the bridge loan including both refinance and sale exit scenarios.

I've done similar analysis for past clients and as the saying goes … the devil is in the details.