Author Topic: Commercial Real Estate Ownership  (Read 4543 times)

jwright

  • Bristles
  • ***
  • Posts: 266
Commercial Real Estate Ownership
« on: April 01, 2015, 10:44:18 AM »
I've searched the forums and ones like MMM, but all of the real estate segments seem to focus on residential rentals.  Is there anyone here with experience on the commercial side?

I have an interesting opportunity that's come up in the Savannah GA area. 

GrayGhost

  • Bristles
  • ***
  • Posts: 389
  • Location: USA
Re: Commercial Real Estate Ownership
« Reply #1 on: April 02, 2015, 04:58:19 AM »
My dad owns his dental office building, which means he gets steady rental checks from the two other office units there every month.

Overall, I'd say that commercial RE can be a lot less troublesome than residential RE, especially if you use NNN leases. Then your responsibilities to the property are minimal at best.

The flipside is that it's very easy for a commercial unit to sit vacant for months or more at a time.

theoverlook

  • Stubble
  • **
  • Posts: 214
Re: Commercial Real Estate Ownership
« Reply #2 on: April 02, 2015, 08:56:29 AM »
I own one mid-size commercial building (65,000sf) which is my primary investment and income generator.  I can try to help!  What are your questions?

One thing that surprises people is the expenses on commercial property are almost always much higher than residential.  From property taxes to the astonishingly high utility bills, you pay for the convenience of not having to come in and plunge toilets at 3am on a Saturday.  And yes, vacancy costs are a very real factor - make sure it's in a desirable location.

jwright

  • Bristles
  • ***
  • Posts: 266
Re: Commercial Real Estate Ownership
« Reply #3 on: April 02, 2015, 01:17:45 PM »
I'm invested in several commercial properties; no residential as I find them to be much more high maintenance for lesser revenue. 

My group just sold a property and put our funds with an intermediary so we could do a 1031 exchange.  The replacement property we are looking at is about 2 hours away in a market that is not quite as hot (read:overpriced) as ours.  We would be buying in an "up and coming area".  We met with urban planners as well as the agents and developers and have heard nothing but great things about how the area is transforming.  The property is pretty run down, but brand new hotels and restaurants have already broke ground on this block.  They are also changing the roadways so that traffic patterns will make this location even more desirable.  Our thought it to stabilize the building and reassess if we want to do some major overhauls and attract higher end tenants in about five years.

It is a risk; but we are saving so much tax money by doing the exchange.  I think if we wait it out five years, someone would buy it to level it and build up. 

theoverlook

  • Stubble
  • **
  • Posts: 214
Re: Commercial Real Estate Ownership
« Reply #4 on: April 06, 2015, 09:06:54 AM »
That sounds like a great plan, as long as the area improves of course.  Our building was in a similar situation - when we bought it, it was on the northern fringes of downtown, surrounded by seas of surface parking and a couple old industrial buildings.  It's now in the heart of a redeveloped area and while parking is more expensive and more difficult to find, we've benefited greatly from the improved area.

How do you find the buildings you've invested in?  We've been interested in scoping out more properties but it's hard to find listings and it seems like the landlords don't like to list some of the buildings publicly to avoid scaring off their tenants.  So, similar to residential I guess, the "good deals" mostly occur through networking.  What about there?

jwright

  • Bristles
  • ***
  • Posts: 266
Re: Commercial Real Estate Ownership
« Reply #5 on: April 08, 2015, 02:31:03 PM »
Well, this place is almost literally a dump.  Just to keep going we need a new roof; hopefully no foundation issues.  We'll know that when we complete the Phase I.  But the building is almost 100 years old.  Once it is stabilized, a REIT still wont' touch it, institutional money won't touch it even if the surrounding area is booming.  We'd have to find another private buyer.  It is just so risky.  But since the money is coming from a 1031 exchange the tax implications are a huge push to get the deal done.

As far as finding property; it is usually word of mouth.  My father has been investing in real estate for 20 years so he knows people in town.  If you aren't in a hurry, you can meet with brokers and tell them what you are looking for, and then they may bring it to you when it comes on the market (hopefully before). 

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28030
  • Age: -999
  • Location: Seattle, WA
Re: Commercial Real Estate Ownership
« Reply #6 on: April 08, 2015, 03:18:53 PM »
Well, this place is almost literally a dump.  Just to keep going we need a new roof; hopefully no foundation issues.  We'll know that when we complete the Phase I.  But the building is almost 100 years old.  Once it is stabilized, a REIT still wont' touch it, institutional money won't touch it even if the surrounding area is booming.  We'd have to find another private buyer.  It is just so risky.  But since the money is coming from a 1031 exchange the tax implications are a huge push to get the deal done.


It always surprises me how willing someone is to take a bad investment (via 1031) to avoid paying some taxes.

No doubt in many cases it's a good move, but I've seen lots of rushed, poor transactions due to that was well..
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Johnny Aloha

  • Bristles
  • ***
  • Posts: 315
Re: Commercial Real Estate Ownership
« Reply #7 on: April 09, 2015, 06:43:30 AM »
So, similar to residential I guess, the "good deals" mostly occur through networking. 

Even more so with commercial.  Most brokers won't respond to emails or calls if they don't know you, and know you CAN close a deal if it fits your criteria.  The commercial space can be hard to break into from multiple perspectives: funding, deal flow, etc ... but if you do break in and close a good deal, it can be a game changer.

jwright

  • Bristles
  • ***
  • Posts: 266
Re: Commercial Real Estate Ownership
« Reply #8 on: April 09, 2015, 02:03:42 PM »
My more to the point question is; would you accept decreased returns or even net operating losses in the early years in order to allow the property to appreciate in value with the surrounding area in the next 5-10 years?

I'm guessing most people on MMM would not, but the tax savings would more than cover the shortfall.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28030
  • Age: -999
  • Location: Seattle, WA
Re: Commercial Real Estate Ownership
« Reply #9 on: April 09, 2015, 02:11:28 PM »
the tax savings would more than cover the shortfall.

[Citation needed.]
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

jwright

  • Bristles
  • ***
  • Posts: 266
Re: Commercial Real Estate Ownership
« Reply #10 on: April 09, 2015, 02:13:56 PM »
the tax savings would more than cover the shortfall.

[Citation needed.]

Based on my proforma financial statements on this particular property and the gain on the sale of my particular relinquished property.   I can obviously only speak to my situation.

theoverlook

  • Stubble
  • **
  • Posts: 214
Re: Commercial Real Estate Ownership
« Reply #11 on: April 09, 2015, 02:28:49 PM »
It can depend on your structure; I know in our case we have our commercial property held in a C corp and with depreciation at this point the basis is  pretty much zero and selling it would result in a punishing tax bill, probably in the low millions.  And THEN we would pay personal taxes to get the money out of the corporate structure and into our hands personally.

I would still not jump into a 1031 exchange without a very nice property identified ahead of time but that's very difficult and you're counting on the property still being available and nothing going wrong with the closing - and 90 days is not very long to close on a commercial property.  I understand if you end up a bit panicked and have to put the money somewhere.  That's why 1031 exchanges are so tricky and fraught with peril.  ("Just a little peril?")

My solution?  Just keep the property, probably for life.  If it makes money, why not?

jwright

  • Bristles
  • ***
  • Posts: 266
Re: Commercial Real Estate Ownership
« Reply #12 on: April 09, 2015, 02:49:37 PM »
It can depend on your structure; I know in our case we have our commercial property held in a C corp and with depreciation at this point the basis is  pretty much zero and selling it would result in a punishing tax bill, probably in the low millions.  And THEN we would pay personal taxes to get the money out of the corporate structure and into our hands personally.

I would still not jump into a 1031 exchange without a very nice property identified ahead of time but that's very difficult and you're counting on the property still being available and nothing going wrong with the closing - and 90 days is not very long to close on a commercial property.  I understand if you end up a bit panicked and have to put the money somewhere.  That's why 1031 exchanges are so tricky and fraught with peril.  ("Just a little peril?")

My solution?  Just keep the property, probably for life.  If it makes money, why not?

I guess I should give more specific details.  The relinquished property had problem tenants; it was staying afloat but we had to make capital contributions every now and then to cover expenses.  We asked the neighboring property if they would like to make an offer, expecting to get $X; we got $X plus $400K.  So we took it.  Tenant problems gone and we get a good offer.  We are looking at tax of about $650K.  Since the closing happened in December, we can put the funds with the intermediary and not pay taxes until 2015 even if we do not complete the exchange since it straddled two tax years.  Why not? 

We identified three properties but the first two don't look like great options.  The third, we don't know.  The $650K tax savings is worth several years of operating expenses in this up and coming neighborhood.  But to make it worthwhile, we either have to find more upscale tenants (ie put a lot of work in to it) who would pay higher rents; or wait out the appreciation with all the changes in the neighborhood. 

As an update, yesterday we gave them a low ball offer.  We would still have a lot of due diligence left to do; we need a clean Phase I to start.  I'm a CPA who works for a real estate developer, so I"m comfortable with the numbers; I just don't know what my risk tolerance is.

Gone Fishing

  • Magnum Stache
  • ******
  • Posts: 2754
  • So Close went fishing on April 1, 2016
    • Journal
Re: Commercial Real Estate Ownership
« Reply #13 on: April 09, 2015, 03:36:12 PM »
I like the idea of commercial property but the problem for me is diversification.  Decent commercial properties tend to be more expensive than residential properties which leaves you with a lot of eggs in one basket.  An investment group like Jwright's can help with diversification, but then you have to deal with other people and that can get messy if you are not careful.  If I woke up one day and had $5-$10 million in stocks I would be really interested in buying a commerical building with a long term credit tenant in the $1-2 million range.  The financing options can be awesome with the right property, tenant, and equity in the deal.  Non-recourse 30 year fixed rates are not uncommon in this arena. These financing options are generally not available for smaller mom & pop occupied properties which leaves you with 15-20 year amortizations, typically with balloons and higher interest rates from commercial banks.       
« Last Edit: April 10, 2015, 09:36:53 AM by So Close »