3rd try - renovate and increase to market rents

[Kevin Davidson]

Investment Info:

Office Space buy & hold investment.

Purchase price: $285,000
Cash invested: $10,000

Appx. 7000 sq.ft. commercial office building in downtown Appleton, WI. Purchased on land contract under a wrap. This was a neglected property with awesome bones and curb appeal in a vibrant downtown location. Former owner had all tenants on month to month rentals at extremely submarket rates. We removed some existing tenants, and secured a 10 year lease on favorable terms from one existing tenant to move into newly renovated space in the building. We have renovated appx. 60% and are in the process of renovating the space the existing tenant vacated. As of this writing, the building does not cash-flow, due to the ongoing renovation of appx. 3200 sq. ft. vacant space. However, we acquired immediate equity of appx. $50K upon closing, and project cashfow of appx. $1800/mo. upon letting the additional space.

What made you interested in investing in this type of deal?

I generally look for off-market with signs of distress and/or poor management. this was a CL ad by seller, and the bldg was also under a listing agent. That signified seller was desperate to move it. From that, I begin due diligence - reviewing the tax records, title records and a drive by and site "scouting" visit to see if it meets additional criteria. Then I reach out to the seller to start a dialogue and plant seeds for a possible seller financed deal.

How did you find this deal and how did you negotiate it?

Craigslist listing. Started negotiations with an email dialogue. A of my deals thus far have been 100% seller financed at closing, so in all communications I am planting the seeds and observing responses on how receptive the seller may be, and how I may pitch the way I prefer to close.

How did you finance this deal?

While I prefer a straight seller note, this bldg. was under a bank lien, and they would allow a land-contract, but seller mortgage in 2nd position. Seller actually signed the Offer with mortgage terms, but in working with seller's bank, I opted to be flexible and meet the bank's requirements. The cash invested cited above is a little off. I was out-of-pocket appx. $7500 at closing with prorations, etc. but we have put appx. $20,000.00 into renovations over the past year.

How did you add value to the deal?

As noted above, immediately removed some (3) severely submarket rent tenants, then marketed and remodeled the vacant space, and brought in new (and converted an existing) tenants at market rates.

What was the outcome?

This has been a great project, the tenants are excited about the improvements, and we are excited to complete the remaining renovations and put this one on the books in the cash-flow column. It should be a healthy performer for many years to come.

Lessons learned? Challenges?

COVID lockdowns and supply shortages tanked keeping renovation schedule - lost 4 months due to that, and that is lost rental revenue because we couldn't renovate the last space until renovations were complete on the then vacant space for the existing tenant's move. We can't rent the now vacant space until those renovations are complete, so we lose some rental income. Upside was the tenant still had functioning space, so we didn't have a prospective tenant back out due to our delays.