Sell or Refinance a Commercial Building?

[Lucinda Hamre]

We bought a commercial property (4200 ft2 home facility that is a handicapped-accessible 8 BR, 2 bath home, with 2 additional ensuite units that have dedicated bathrooms) that required significant work. As newbies, we were not prepared for the significant work required to the fire suppression system, fire doors and other deferred maintenance issues. But, we turned this into a lodging house for short-term, month to month rentals, with city approval for Airbnb rentals in the future. As newbies, we made MANY mistakes and went way over budget and took far longer than planned. Still, we redeemed a building that was sitting idle and brought it to a great condition again. People walk in and say, "wow, this is nice and far bigger than we thought!"

We were approached by a city official and asked if we would consider selling the property to a nonprofit for a daycare center. We said, "let's talk." The informal negotiations have been ongoing for almost 18 months. We've stumbled and bumbled enough. We have options and such mixed feelings; we really like this property:

1. Lease to purchase, which they will likely want to explore so that they have lower out-of-pocket expenses up front; they want to alter the interior walls and totally change the bathrooms to accommodate their needs. But we are concerned about putting additional money back in once they change so much. We are not sophisticated enough to figure out these details and our lawyer basically said "uh, no!"

2. Basic cash out, hopefully with a 1031 exchange. But we have nothing identified and are not accredited investors so that we can reinvest in something else.

3. Carry owner-financing to get them going. Again, this is a risk if they fail and then have altered the floor plan significantly. But, it could provide us with cash flow over 5 or 10 years, or even longer. With rapidly increasing prices, we question if the bubble will pop. We have begun to see a correction in the market in NW MN and NE ND.

4. OR, get our poop in a group and figure out how to attract better renters, then do a BRRR for $125K original input. If the house was HALF filled, we would have ~$500 per month over costs. Even with a cash-out refi, we could still get cash flow if we could figured out how to put more people in the house and keep harmony. We have been working on systems to make life easier and more efficient.