All Forum Posts by: Michael Willis

Hi David, I haven’t yet. Any recommendations in the north NJ area?

Hi All, I need a capable, reputable and experienced commercial finance expert's assistance. I have about 20% cash in hand on a residential commercial property at 975k with 10 units, which is occupied in Northern NJ.  Total cash in hand is 190-195k or almost exactly 20%. There are several issues like no reserves, and not to 30%. Need an ideas person to assist. Perhaps a 20% mortgage with a 10% line of credit?  

Oren, I agree. If I am possibly spending 2.4m I will do a complete due diligence including that report. 

Couple of things to share having just got additional detailed information from the owner:

• Rents in building avg. $24.52 (submarket is $22.07) 
• Price per sq. ft. ranges from $14.52 to $39.32. 
• Property is reportedly approximately 16,500 sq ft but rentable space totals 13,600 sq. ft.

8 out of 16 units are between 650 sq. ft. and 850 sq ft. Largest (and only) space being 2200 sq. ft. There are 3 units smaller than 650 sq. ft. and 3 bigger than 850 sq. ft. for a total of 16 tenants. 

To be clear this is not your modern boxed office building but one of different spaces built at different times having smaller units. Although this may be an advantage through a downturn and easier to fill I'm thinking. 

Questions

1. Should the range of price per sq. ft. be a red flag or be understandable/commonplace given the smaller size of these spaces?
2. Is it to be expected that out of approximately 16.5k sq. ft. 13.6k is rentable?
3. What if anything else am I not thinking of that I should be?

Thanks for the input!

Russ, it's as I expected. Like you I am a residential investor primarily. This would be my first office holding. I like it for the higher cap rate and overall size. Thanks for that input.  Very useful.

I will take a closer look at financing. Agreed on the risk. Do you find the office property a better investment dollar for dollar than your multifamilies? Less work? Have you had vacancies? Someone told me with commercial it’s less work bc no kitchens and baths to deal with etc

Ps- this is 100% office but with some scattered retail within. Again a strange mish mosh of businesses. 

Russ, do you own office properties?  If so, how does this measure up to your investment standards? Anyone else who owns office properties is welcome to chime in...

I should add that my target is 2.35m or less and I am setting my top at 2.4m. Current owner is looking for slightly above 2.5m. Not looking to make a deal where there isn't one that makes sense. 

No owner financing.  If all is right, being ultra conservative, including a 13% vacancy discount  consistent with the office submarket into the mix (gross rents are reportedly 324k/yr - 13% vacancy for submarket = 282k rents - 104k in expenses), w/ 30% down at about 5% it'll cash flow about 80k/yr. at 2.35m - again being ultra conservative given its 100% rented. At 10% vacancy the after financing cash flow rises to about 96k with 705k down or about 13.5% cash on cash.  

HI Josh, excellent feedback and questions.  Keep in mind this property is listed as a 2 star property, which I need to hone in but 3 star and 2 star properties are nearly the same leasing rate in the submarket. My understanding/impression is that most of the 15 tenants are in the 700-1500 sq ft. range with the largest space being 2200 sq. ft.

The Office Submarket looks as such:

•  Flat capital growth and lease rate growth since the recession
• 13.7% average vacancy rate in submarket 3 star (10.9% across all level properties)
• Availability rate 13.9%
• 12 month net absorption SF 227k
• Average 12 month sales Cap 7.7% (across all star properties)
• 0 new properties under construction or to be delivered in the next 12 months 
• Average lease rates are $22-24 sq. ft (this property is about 21.5-22)

Value add (seems to be a stretch but might be):

• Upgrading interior hallways and exterior for a broader appeal and capital appreciation
• Offer basic build outs to interested parties (not something the current owners do) 

Working against the office submarket in North NJ is a declining population.and high property taxes but the 2 star being at the bottom may be better equipped to handle stagnancy.

This building is on main road with a15-17k car count a year/ does provide signage is near retail and less than a 1/5 mile off a highway exit and is close to a city center.  The property seems to cater to the lower end of the market but attracts some doctors, social workers, and related and unrelated types of businesses.   

If acquired at a 9 cap+ just for longer term holding it might make sense. Residential is 5-6% cap or less in my area but also with a 3% vacancy rate and and usually rent control of some sort.