Commercial Real Estate

Just looking to see if anyone in the AudioKarma pool has ever been involved with the purchase of a really large piece of commercial real estate. I've bought/sold several residential homes, and own a 900 sq.ft commerical building (FS, BTW ) but have never done anything as large as what I'm considering. I have NO idea what to expect with regard to "down payment", mortgage length, interest rate, etc. On Monday, I'll have the time to hit some banks.

I know I'll likely have to pool some investors (this is not a solicitation) and use a combo of my own and borrowed money. I'm building a business plan, but I need to know a few basics about what to expect.

The building is a former 110,000 sq. ft "big-box" store in suburban Detroit. It has been vacant for around 5 years, and was built in 1997-ish. The rest of the retail development on this parcel is as good as DEAD. (Abandoned Super K-mart, Abandoned PetSmart, and a bunch of empty small stores) But it is a great, busy area. My proposed use has very little to do with retail, and my re-hab costs would be minimal. I really do believe it could be a huge business opportunity... enough to revive the dead development.

Here's the relevant text taken from an e-mail I received after inquiry:

With regards to lease rates, the owner would prefer to sell the property. The asking price is $5.5 million. They would lease the property, but it would probably require a 3-5 year lease at a rate of $5 or $6 dollars NNN per square foot.

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This kind of lease rate, $550,000 a year is insane, and just signals to me that they really only want to sell. Let's figure a purchase price around $4 million.

Do you think I could get a monthly payment down to around $10,000?

tough sell

Without an existing business to move into it that can show revenue to support the payment obligations, the banks here would probably require about 50% as a down payment. It would also depend on the type of industry you will be involved in. Some of the banks here are avoiding lending all together for certain ventures.
In your case since all the big commercial lenders will know the history of the past failures in the area, they may be extra hesitant to lend.

If you had a solid business plan, or better yet, contracts for future business it will help.

Good luck!

I am not an expert on this but here are my thoughts...Do you plan on re-sale of the building to another business or are you going to be installing your own venture in the building?
I would be reluctant to buy anything in an area with defunct businesses around unless those would be part of your development plan too...it doesn't seem like people are drawn to an establishment where the area around it doesn't look good.
I just think I would advise against it...one thing you have to watch too are the taxes. It could be that the building would sell for a certain amount that is low, but the assesors office would assign a much higher appraised value and you'd be stuck with a huge property tax burden. Then there is the cost of repairs and maintenance and the heating and AC and electricity bill which could be astronomical.

It's unlikely that you'll get a bank to lend on it unless you can demonstrate that you and your partners can carry the weight without a tenant.

$3,000,000 at 7% for 30 years is right at $20k per month, p + i. Just taking a wild guess here, but on loans like this you're probably looking at P + 1 or 2. And, most lenders will want to amortize the loan over 30 yrs with a balloon after 5 yrs on commercial property.

I have an Excel template that calcs a level payment note using the PMT function. I'll em it to you, if you want it. Pretty handy.

Most of these deals are done through limited partnerships with you as the general partner and one of the limiteds as the lender. Or, a group of guys that all put up some dough and have an interest in a general partnership porportionate to their investment, with an outside lender.

Sounds like a fun project! Good luck with it.

Murray

You didn't give us enough detail to really help, but here are some random thoughts:

1. If you really think that your new business can revitalize the area, raise some extra capital and go get options on all of the surrounding parcels.

2. You probably want to form two new legal entities: one for the new business and one to own the real estate. Most lenders will not want to lend to an operating business. They prefer to lend to newly formed single-purpose entities ("SPEs"), which then lease to the operating business.

3. You should be able to negotiate a lease in which you move in for next to nothing, rent for 6 months cheap, then either buy or start paying real rent, at a fixed purchase price. After five years vacant the seller must be dying, or dead. Is it an owner or a lender who is selling?

4. You will want to check out the building for deferred maintenance before you buy. Five vacant years can mean that the roof leaks, sewers don't work, etc., etc. A new roof for a box that big can easily cost $110,000 in a place like Detroit.

5. If the whole area is vacant, you should investigate programs for rehabilitation and renewal. There may be special loans available, or even grants. SBA loans might be available for the business.

6. If you can get options to buy or lease the whole mall, you could then seek an anchor tenant or two, then buy the whole development. The presence of a credit tenant may qualify you for conduit loans, which you won't be able to get otherwise. The rate could be as much as 2% lower.

7. After 5 vacant years, the seller should be happy to have anyone show up with a real interest and even a little bit of capital. For such a long shot though, you should try to use options or long inspection periods with assignment clauses to allow you to try to assemble a deal with little capital tied up. Unless the area is suddenly gentrifying, this ought to be possible, and an abandoned Petsmart means there were really big problems before.

I love to hear about long-shot, shoot-the moon strategies. Good luck!

Hey... Really appreciate the comments, lots of good ideas here. I apologize for playing so close to my vest regarding details for my plan, but you never know who is lurking. However I can offer more detail on the property, and I will say that I don't think anything retail would survive here, without a really strong anchor... Which K-mart was/is not. The strip, especially the building I'm interested in, is just too hard too see from the main road. My planned use isn't retail, and if there are zoning issues, I don't think the city would object to a re-zone, since the place is starting to become a "problem"... I think they want the place occupied.

For the record, I'm not interested in the rest of the retail strip. There are some rumors floating that a Super Wal-Mart might take over the vacant Super K-mart.( :yuck: For three reasons... 1) Wal-mart won't do a thing to help me bring in customers. 2) Some "action" in the area might make these folk think the building is worth more. 3) I hate Wal-mart anyways.)

This real-estate is more like a "power-center", to use a newer term for a strip mall. It stretches more than a 1/4 mile, in a straight line. The old K-mart anchors the southern end, then a few hundred feet of 1000-5000 sq. ft shops (mostly empty). Next is an abandoned PetSmart (separate blg.) Finally, at the North end is the 110,000 sq. ft former Builder's Square.

The property has five outparcel restaurants. Four are doing well, filled with "chain" places. The fifth is vacant. These are key to my plan.

To answer some other questions:

After five years vacant the seller must be dying, or dead. Is it an owner or a lender who is selling?

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I believe it's an agency, TrammellCrow. They are representing a client.

$3,000,000 at 7% for 30 years is right at $20k per month, p + i. Just taking a wild guess here, but on loans like this you're probably looking at P + 1 or 2. And, most lenders will want to amortize the loan over 30 yrs with a balloon after 5 yrs on commercial property.

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Is the 30 year amortization typical? Please explain P1, P2?

Thanks again.

I'm thinking of some vacant big-boxes around here that have been redeveloped. One is a shopping mall that was converted to mostly office space, part corporate/part government. It seems to have worked. I know of one place that was taken over by a large telmarketing firm. I have been in there (many years ago) & they basically just filled it with cubicles & computers. An older Service Merchandise was converted to some sort of office space.

When one local Kmart closed a guy bought the whole center & converted a shuttered Rite Aid into an offtrack betting parlor. He seems to do well with it. Thing is, that Kmart is still vacant after many years. I have an idea that he is still hoping slot machines will be legalized here meaning he could fill that big box with one-armed bandits overnight & be in business.

I've seen a number of stores converted to antique malls, auctions or indoor flea markets. You need good management to get ahead with any of those.

There is a LOT of long vacant big box property out there. This area's first shopping mall has been basically dead for about 15 years now. Several times its changed hands, always for big money, with optimistic talk in the paper about all the new owner's redevelopment plans. Nothing has happened yet.

From what I've seen the big players in big boxes don't care to move in & take over empty shell buildings. In the case of the aforementioned Kmart, they came in & bought a defunct Ames, demolished it, built this new store, then closed it. Down the street Wal*Mart bought a defunct Jamesway, demolished it & built there new store. I know of a Hechingers which has been vacant for years while Lowes built a new store next door to this empty big box, then abandoned it to build a bigger store across the street, ditto Home Depot. It would seem in these cases that the seller would be willing to cut his losses.

I've dabbled a bit in this, and looked at a similar situation- empty big box store and associated properties. I got a wise piece of advice from a seasoned pro.... "there are a lot of people who know how to make good money in real estate who could easily take this on and afford to lose money as they developed it, with big returns in the end. But they aren't biting this one... ask yourself why"

Now the group that did buy it went bankrupt and I'm glad it wasn't me! But if your plan is good enough, and the price is good enough, you might be smart enough to be one of the big players! And I hope you are! I just found out I wasn't and am glad I did!

I don't know Carmine. I know the property you speak of ( I suspected it at first and your later descriptions confirm it.) I don't know what your plans are, but for some rasons, it doesn't draw much traffic. Check out the traffic at the restauraunt in the strip proper, not the outlying satellites and see what they draw.
I know you said you don't have retail plans, but there are lots of these big barns left. I've worked for Warehouse Club, Pace, Sam's and Costco and there's more than a few empty buildings left over fom the shakeout in the business. Aren't some of the old Meijer SourceClubs still vacant, as well as the old Builder's Squares? One would think that the owner's would be chomping the the bits to get this property leased, but Detroit seems to be a city full of big old empty buildings. I mean aren't there all sorts of abandoned hotels, etc downtown too. Why, I don't know, but there are lots of tricks to real estate that could make it worthwhile to leave them vacant.

BTW, your not planning on using it for a vintage TV museum, are you??? :lmao:

All your concerns are appreciated... I agree, this center is a textbook example of how NOT to build a retail strip. I couldn't think of a bigger group of loser anchors, or a better way to hide them behind the outparcels.

BTW Andyman, nice detective work, lol! If you can think of any other vacant big-boxes in MACOMB county, and reasonably close to 696/ Oakland county I'll be all ears.

If I explained my planned use it might make a bit more sense, but that would kill the fun, right? I'm just hoping my idea is one that will make people smack their heads... Maybe not... Maybe I'll just be smacking my head against the walls!

I'm impressed with your thinking "big"! Even if it doesn't happen I suspect you will learn a lot about the process! Nothing wrong with that.... just err on the side of too cautious when doing big deals...