My first Commercial Deal

[Michael G.]

Hi BP!

My first Commercial deal, and actually my first real deal that I'm actively driving, so would love a second set of eyes on this.

• Office Building, single story, 4,257 SF rentable space on 1/3 acre, originally 4 units but reconfigured to 3.  All rents Gross + City Tax + separately metered for electric.  Has nice curb appeal.
• Tenant #1 is current owner who built the building in 2001, and would like a new 3-5 year lease at a rate that we are happy with.
• Tenant #2 has existing lease thru 2021 at a rate that we are also happy with.
• Unit #3 is 1,200 SF that we think is easily rentable at $15-$20 SF/Year.

With the above scenario, we calculate:

• GRM 6.7
• Debt Coverage 1.82
• Cap Rate (Purchase Price) 9.4
• Cash/Cash Return 13.4% with 8% vacancy factor.  Cash Flow should be $24K/year with $180K into it once financed.

Our angles in this deal (I think):

• Financials do not look good since the current owner is the main tenant and has never paid rent, so financing it would be difficult for a potential buyer. We plan on paying cash, and then refinancing to 70% LTV in 5-6 months with current owner on a lease and paying rent, and 3rd unit rented.
• From what we're told, there is a family squabble over the building, and the consensus was to "sell the damned thing" to settle the disagreement. (Taking this with a grain of salt)
• Building was listed for 1-2 months at a much higher price, at which it would have yielded the average 5% Cash/Cash and 5% CAP rate. Recent price reduction of $120K and we got it under contract almost immediately after it was listed at the new lower price.
• We have done local rent surveys and we think we are competitive.
  

We're still in the Due Diligence phase right now, and are getting: Appraisal, environmental study, HUD statement, utility details, insurance, financing.

Anything that you think we should be considering here, either about this deal or about getting into an office building in general?