All Forum Posts by: Katie Neason

There are lots of us

Mayer M. you're talking over my head. I don't know what meter spread is...

I recently completed the construction of a 26 unit mixed use building. There are up to 6 commercial tenants and 20 residential lofts. I thought I was being brilliant by installing submeters for all of the units. I am 8 months into the first tenant moving in and two tenants from being full and I cannot figure out how to use effectively and efficiently use the submeters (sensus). My property management company doesn't know, Sensus is clueless, I talked with the city and my main contact there said he could teach me how to read them manually, I have reached out to a few apartment owners and developers in town and NOBODY knows! I am not going to read 26 meters each month! There must be a service or way to make this automated. I am looking for a way to automatically read them, generate a bill monthly and send it to the tenants. A system I can pass off to the management company and they can execute. I have been investing for over 10 years and have always heard, if you can go into a property and find a way to submeter it you can force appreciation through a higher NOI. Here I am with the units submetered and I can't figure out how to make it work 🤪. I know there is an established system that makes sense. Who knows what it is?

You may have more information than is listed here, but you cannot calculate the ROI based on the information provided. Three are no expenses here. Who pays utilities? Are they metered separately or is the landlord paying for them? Is there common space? If so I suspect there are janitorial services needed to keep that space clean. Is the building sprinkled if so you will have annual fire monitoring and inspection costs. I do not know what your property taxes are, but in Texas they would be about $8200/year. I own a couple of similar properties with some common space. The tenants pay their own electric bill. Landlord pays water, sewer and trash and my expenses before financing run about 25% of collected rents. Based on similar assumptions with a 7% vacancy factor, your operating income before financing and capital reserve would be ~$29,000/year. Assuming 25% down and 25 year amortization at 4.5% interest, your Free Cash Flow before Capital reserves is ~$9,000/year. That makes your annual ROI 10% before capital reserves. Still may be a good deal for you, but wanted to make sure you are looking at the full picture. I would try to get a handle on all the expenses, make sure it is a product that is in demand and explore what the zoning is on the house. Can you develop another mixed use building there? This is how I would explore the opportunity. I would worry less about "am I paying too much for it" and more what can I pay based on the returns and appreciation I am looking for. Hope that helps.

Just couple of quick thoughts on the subject.
1. National chains have very specific bogies that have to be hit to consider a market or submarket. Ie income, density, drive by traffic, etc. If your downtown demographics don’t hit their minimum standards you will not get on their radar regardless of the amount spent on the building. From there they will look at site characteristics such as location, parking, drive thru, etc. 

2. The demographic hurdles are similar with the majority of all the national chains so typically there either are or there are not national chains present. There are a couple of exceptions. Subway comes to mind. They will go anywhere. 
3. National Chains in a downtown can be a “dirty” word. They may even have restrictions against it. You will want to check with the local jurisdiction. 
4. If the location supports national chains then it is a matter of working with the right brokers that represent the chains you are interested in. 
5. it is a bit of an uphill battle because it is easier for development arms of these national chains to go into newly developing projects and have something built the way they want from scratch, rather than have to retro fit an old building. 
6. I would focus on more regional type  companies that you think would be a good fit and reach out to them directly. You will likely get to talk to the decision makers and find out pretty quick what the demographic requirements and site parameters are. 

When I broke into this market I did the following: 

1. partnered with someone who had experience. Did a smaller deal (2 story multi tenant building under $1MM all in cost. 

2. Found 2 tenants that wanted to rent the space while I had it under contract. Including me that was 3 tenants and 50% of the occupancy. This was not required by the bank but was required by me for my comfort level.  

3. Did a value add property. The building was vacant and required a MAJOR renovation (it was exterior walls, a roof and dirt floors).  

4. BRRRR'd the property with a cash out refi at the end of year 3.

We flip SFR and we BRRRR and build commercial properties for cash flow.

On my commercial project loans, which are smaller (loans $2MM or less), I never agree to a prepayment penalty. They are typically 5-10 year maturity over a 20-25 year amortization. The only prepayment penalty I have agreed to was for a new construction mixed use building. They underwrote a two year construction loan that automatically rolled into an amortizing loan. It had a prepayment penalty if I refinanced during the first year of the permanent financing. I would ask for them to take it out and get 2-3 more term sheets and compare. 

We also call them boob lights! 😁 We do not use them ever and we are generally flipping houses under $200,000 which may be equivalent to a $750M house in Jay’s market 🤷‍♀️. 

We have done what is effectively a BRRRR on a couple of commercial properties and are working on a 3rd. On the first we were able to get an 18 month interest only loan for the purchase and renovation cost that automatically converted to amortizing permanent financing with a local bank. We refinanced it last year with a local credit union and got all of our initial cash out. The second one, we are wrapping up the renovations now. We got a loan for the purchase price and renovations from effectively a hard money lender. It is interest only for 12 months. We had to move fast because it was days from foreclosure and we did not put any money in the deal so the hard money lender made sense in spite of being expensive. We are in the process of getting permanent financing in place now either through a local bank or credit union. If the third one goes through we will get a purchase and construction loan from a local bank. It sounds like our renovation budgets were bigger than what you are looking at. The first one it was 200% the purchase price, the second and third is about 75% of the purchase price.