All Forum Posts by: Brett Peters

@Zack Takacs It sounds to me like the property is for sale by owner. If there is no direct contact number, you are going to have to do a little detective work with property assessments or maybe just talk to a few neighbors to get more info.

To answer your first question, whether this is worth looking into or not is highly dependent on the results of a market analysis. For example, in my area, these type of mixed-use buildings are in pretty high demand. But that is mostly due to investors desiring to convert them into all residential units. Now, smaller retail shops like this usually have relatively high turnover (if the tenant is not already living at the property). You will see a lot of interest from smaller and less established business owners who may not have the staying power. This just comes with the territory. You also have to keep in mind that residential tenants in properties like this tend to complain about the noise level of the businesses downstairs. Hours of operation can be really important, otherwise you may be causing turnover up top. 

 To answer your second question, in my area these types of investments are very easy to finance. However, you need to find out the occupancy level of the property ie. how many units are vacant. Any property that is not fully occupied is inherently more difficult to finance. Lastly, if by "calculating", you mean performing a financial analysis to determine projected income, the answer is no it is not more difficult to calculate. It is amongst the easiest of commercial property types to pin down. 

@Deuris Liquey I suggest that you run the comps by both sfh (rentals) as well as multi family up to 4 units. You should get a sense on the price per unit fairly quickly. Definitely make sure the sfh's are not owner occupied, since it is an investment it will be analyzed based upon the income stream and anything over 5 units is commercial and may skew your results. 

@Andrew Gomez 1.) Important factors to look for. With this type of commercial property, likely the most important aspect you will want to consider is the environmental aspect. It is very common for commercial properties to have underground storage tanks or USTs. These tanks can contain anything from waste oil to gasoline, for example if there was a gas station there in the 1950's, those tanks could possible have never been removed and can easily cost 10's of thousands to be remediated. So, the first step is to ask if a phase 1 or phase 2 has ever been conducted. Remember that there is no requirement for a seller's disclosure in CRE, ie. Buyer beware. I have even seen churches with USTs. There is many more factors then this but for the sake of brevity I will end this one here. 2.) Best avenue for financing. I would speak with a commercial broker and see what commercial banker they would recommend for this type of deal. CRE is a very broad but niche asset class and you want to work with the people who do this type of thing frequently not just a few times per year. 3.) What amount of capital is needed. Typically commercial loans range from 25% to 30% down. However, it could be more depending on the asset type and the risk associated with the investment. You also have to consider your budget for improvements, if any, and how would the owner participate in them, if at all. If the initial capital outlay is too intensive for you, you could also negotiate and lease with the option to purchase. Commercial property owners will typically go for this if the property is to be purchased within 5 years. CRE is truly the wild west of real estate. The best advice I can give is to team up with professionals who specialize in this arena. It is nothing like apartments and you will save yourself the time it take to establish a huge learning curve.

@Tim Dwight, Yes you are correct. With all things commercial the buck stops at zoning. I would suggest googling a zoning map for your target area, you can then dqwnload a "table of permitted uses" from the county's website. If you have trouble finding the table simply call the zoning office and ask them to send you one. This doc will tell you exactly what you can do by right, anything beyond that scope of uses you will need to get a variance. The codes office will be able to answer questions about renovation.

@Tim Dwight If the property is zoned MU, than yes you can convert into all apartments without seeking a variance. However, this is not to say that you may not trigger inspections from the county that may require you to make certain improvements. For example, an extra egress or a sprinkler system. 

@Will Kenner Hey Will. Here is some info I have written on the topic....

To some extent, every established business owner is familiar with the concept of raising capital. From the more common ways to achieve an influx of cash are bootstrapping, crowdfunding, and you guessed it, good old conventional financing. If these concepts sound mundane and unappealing, you would not be alone in that assertion. However, there is a much more attractive alternative that I believe is significantly less pronounced and can be simultaneously more lucrative. If you have owned the facility in which your business operates for a fairly long period of time, it is likely that you have built up a considerable amount of equity from which you can execute a sale leaseback strategy.

So, what exactly is a sale lease back? A sale leaseback is a transaction in which an owner occupant sells their current location to an investor, and at the same time forms a lease to lease the space back from the new owner. For clarity, let’s use a quick example. Danielle is the owner of a successful company that manufactures 3D printing materials and supplies. She has owned the Industrial warehouse in which her business operates for the past ten years and her property has appreciated significantly over that time due to the rising appeal of Industrial real estate as an investment. Now, Danielle does not want to pick up and go to an entirely new location but she is interested in tapping into the equity she has in the property and what that injection in capital could mean for her business. In this situation, Danielle can sell her property to an investor, who agrees to lease the space back to Danielle at agreed upon terms. This allows Danielle to receive the cash from her ownership position and still continue to operate the business in the same location virtually uninterrupted.

How does the user benefit from a sale leaseback transaction? Let me count the ways. Essentially, through performing a sale lease back the user is able to not only convert their illiquid asset (real estate) into cash but is also privy to maintain their usage of the property. To add, in this situation the user avoids other more expensive forms of raising capital like conventional financing which shows up on the businesses balance sheet as a primary liability. In the same vein, if you are at a stage in your career where you are looking at a viable exit strategy, a less commonly known fact is that it is much more desirable to sell your real estate prior to you selling your business. Conducting your liquidation sequentially allows you to reap the maximum sale proceeds of each. To elucidate, your business and real estate are both taxed differently and it has been my experience that in these situations one is often forced to artificially lower the value of either to mitigate the tax impact on sale. 

Last but not least, it is very plausible that you could be receiving higher returns in your day to day business and unleashing this tied up cash can free up just the capital you need for expansion of operations.
Why would an investor decide to enter into a sale leaseback transaction? I’m sure any savvy investor reading this is thinking, “Why not”? What could be better than purchasing a cash flowing piece of real estate with a long-term tenant already in place? The tenant is obviously sold on the location, otherwise they wouldn’t have any desire to lease it back. There is no need to sell the tenant on the plethora of virtues of the facility or negotiate major TI’s. To add, it is highly likely that the tenant will be low management intensive since they have an established track record of ownership and perhaps even a non-tangible attachment to the property.

To conclude, a sale leaseback can be an optimal solution for both a business owner and commercial real estate investor. This strategy can not only provide a viable alternative to more expensive and less convenient ways to raise capital but can also open a pathway for your business to continue to grow and flourish. It is pertinent for me to mention that one of the biggest factors to quantify when considering a sale lease back is your tax impact on sale. Consulting a commercial real estate practitioner as well as a CPA will allow you properly evaluate your adjusted basis in the property so as to know whether you will have a positive gain on sale or the proceeds will be in the negative. During the disposition phase of ownership, the owner of commercial real estate has many options, one of them being a sale leaseback and it is critical to your business to ensure you are choosing the alternative that best fits your desired outcome.

@Genaro Reyes I am assuming the only improvements on the land is the sfr, is this correct? If that is the case then your next step depends heavily on how much disposable capital you have as well as how long you are willing to wait to see a return. For example, if you decided to develop then you are going to have to go through at least a phase 1 and maybe even a phase 2 depending on the integrity of the land. You also are going to have to go through plan approval and bring in an architect. You also have to be prepared to go for at least a year of negative cash flow. Developing is inherently a speculative investment and consequently carries a lot of risk. If this is fairly new to you and you want to take that on I would pair up with another developer. Mixed-use zoning is great because you can put almost anything there, retail, office, mf, etc. and keeping it as just a sfr is not the property's highest and best use.  But the path of least resistance is likely to simply sell it to a developer. 

@Felix Torres A phase 1  is a "historical" environmental site assessment that is conducted to detect any potential or existing contamination issues within the earth based upon the past uses of the property. For example, say their was an abandoned oil tank or and underground gas line the phase 1 study will identify that. If their is nothing in the phase 1 to cause concern you are in good shape. If not, then you will have to proceed to a phase 2 and or a phase 3, which are more invasive and also expensive. But a phase 1 can save you a huge headache and out of pocket cost. You have to keep in mind that a "seller's disclosure" is not required by law in commercial real estate. It is legally buyer beware...if the seller chooses to disclose something like that it is their prerogative. Hence, it is common for lenders to require a phase 1 on certain commercial sites.

@Felix Torres The steps to purchasing a mixed use property have been accurately described by @Steve Mandelbaum. The only thing I would add is that even though these properties have residential units, they are still considered commercial. The fact that the property is fully occupied is on your side as far as financing is concerned. The bank may require a phase 1. Many of these properties are dated and could have been anything from a hotel to a gas station in times passed. Hence, it is important to find out what is under the ground prior to purchase...literally. In my area I am seeing these properties get converted to apartment buildings. But all in all I would say define your ideal use, check compatibility with zoning and get a phase 1.

@Nathan Lose Welcome to the community Nathan! Your story is inspiring and I commend you on the progress you have made thus far. The sky is the limit. I am a commercial realtor from Lancaster, PA. Where in PA do you invest?