The Fed Government is Selling their building!!

General Real Estate Investing
1

This is the first building that made my heart pump when I saw the picture of it. She is like a Victoria Secret model dressed in a bathing suit tenderly calling out my name. :biggrin and…this is a really interesting case study!

The federal government is selling one of their buildings in a smaller region, it’s a beautiful concrete-brick office building, bright red exterior, with a nice shinning Government Emblem embedded at front. Large windows and neatly trimmed lawn, she is a beauty. The cost to build this thing would be 2 million plus. They are selling at the price of $320k.

Currently there are 4 government tenants, with leases ending between March 2015 and 2016. They have expressed intention of continuing leasing the place after. How reliable is that information? I have to investigate, but it is a condition of the sale. There is also 1 private tenant. Building is about 87% full according to the listing, but there is no way to confirm what’s the actual GSI as the building is about 1500 km from where I live. The local commercial building vacancy rate is estimated at 13%. However from a federal agency’s perspective there is no other building like this in the area, not nearly as glorious.

The current rent income is 125k gross, but the actual expense for last year is at a staggering 107k.
The list of expense is long and really detailed, recorded for every month for the past 36 months.
Breaking down the 100 items into 4 categories: Cleaning and trash removal at 17k, maintenance and repair at 45k, utilities at 34k, road/ground/parking lot service at 11k.

Well, so much for the 50/50 rule. this building is running at 85% expense ratio. :shocked I kind of expected that the government has a higher standard of maintaining this building, but never this high!! That makes me think, if I lose 1 key tenant (30% of gross), this building would be upside down. Isn’t that high risk?

However this building caught dozen other buyers attention, and I can just imagine how they drool over it. The seller is not taking offers until January next year, and from the looks of it, it’s going to attract plenty offers.

Everyone is thinking the same thing, maybe the government is paying too much? Maybe they can reduce the expense and make this building more profitable, so it looks as nice on paper as the actual building. But the big question is HOW to do that. Maybe the service contracts currently are too expensive, but I won’t know until I find out exactly what those contractors do, and that might only be available until after closing.

:help I want to submit a solid offer, but not at a price that would put on too much risk. Any thoughts?

Edit: hmm i was blind sighted by the list of expenses, only to realize that the government doesn’t pay tax! :evil So there is additional 10k tax and building insurance maybe 5k, well, at least now I know why they are selling this

2

The building is 50 years old, but it looks brand new. And that’s why I can’t figure out why every year the repair cost is so high.

Actually I posted the major expenses here, need input on how to reduce them. Some of them I don’t even know what they are.

http://www.reiclub.com/forums/index.php/topic,56820.0.html

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BFC, you’re splitting up a discussion about the same property over different threads and asking the same questions. That’s a tad irritating.

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Ok here is what I wrote:

Building: 2-floor, 7000 sq commercial offices, large parking lot with a small front lawn area

Gross Income 125k
Expense 107k + 10k tax + 5k Insurance
Here are some of the larger listed costs:

Cleaning Contractor: around 1.1k per month, annual 13k ~14k
garbage collection: around $200 per month, annual $2400 ~ $3800
Payroll O&M: around $550 per month, annual $5k ~ 6.5k (Considering cut)
Vertical & horizontal transportation: $200 a month, annual $2400 (no idea what this is, for elevator?)
water testing: $600 a year
plumbing: $1000 a year
HVAC: $3000 a year
Minor repairs: $34 ~ 45k a year
Fire and Life Safety: $25 a month, annual $300
Electricity: $14k~16k a year
Fuel Oil: $17~19k a year
Water & Sewage: $300 a year
Roads and Grounds service contract: $10k a year, cost mostly in winter
Security Fee: $500 a year

Some of the cost are fixed cost regardless of the vacancy, like cleaning, roads and ground services, so the profit margin should improve if the building is 100% filled. (Currently around 85%) Nevermind I dug deeper and found some space are not rentable, so it’s more like 90% rented.

By looking at the list there isn’t much I can reduce. My idea is combine cleaning/garbage collection/ground and road service into one full time worker on site, and that can save maybe 7k,
eliminate O&M payroll (+6k) and reduce repair cost by 20k, reduce HVAC service by half

All this is based on the cost I’ve seen on similar buildings, there is just an educated guess (even though inadequately educated on this matter) There is no way to find out exactly what those contractors do, but I don’t think it’s reasonable that any building in the similar size can incur 35k to 40k repair every single year.

I have come to realize this is a complex deal, and also impossible to finance without showing exact plan to reduce expenses. Adding to the complexity is that the government leases are 60 pages long, and there are 3 of them + 1 private tenant. However for the potential gain I am still going to submit an offer, just much less than what they are asking, a price that I know for a fact I can get money to pay for.

5

Pro Forma:
PRiCE: $325,000
DOWN: $100,000
BALANCE: $225,000 (30yr @ 6%)
PAYMENT: $ 16,187 (Annual)

Net leasable space: 6,300 sqft
$1.65 per leasable sqft.

GSI: $125,000
EXP: <$ 62,500>
NOI: $ 62,500
PAYMENT: <$ 16,187)>
CASHFLOW:$ 46,313

COC: 46%
CAP: 19%
GRM: 2.6 (just for giggles)

Current (stated) Numbers:
GSI: $125,000
EXP: <$107,000>
NOI: $ 18,000
PAYMENT: <$ 16,187)>
CASHFLOW: $ 1,813

COC: .01%
CAP: .05%
GRM: 2.6 (still just for giggles)

This property makes zero sense a 85% in expenses.
So, the question comes back to whether you can trim the expenses by at least $44,500, or 50% of the current GSI…

I have no idea.

If the current tenants remain on new leases, they may require that all these superfluous services be maintained by you, and give you no choice, but to maintain an overhead that orbits the moon by most standards. I don’t know.

If the expenses are more statutory for government-run operations, and you can’t fire the ash-tray attendant, and the chief booger picker for the parking lot attendant’s wheel sniffers, than this would be a pass.

Now, you might consider leasing the building to the government on a triple net basis, where they take care of everything, and just make a rent payment to you…? Would that be an answer? This way the government can keep the chief booger picker, and wheel sniffer on staff, and you just have to manage the privately leased space. That can’t be that expensive?

There’s a lot more to consider, but it really requires being onsite and talking with those that know better, and I be not that person.

I wouldn’t buy this building. It’s too far away. Too small a market. One vacancy is likely to upend average returns for years.

That’s all I’ve got to offer.

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Hi Jay, thank you for your input.

Most of the time while I am writing the deals here, my train of thought becomes much clearer. :biggrin
As you said, the key to this deal is reducing expenses, and in the leases. The 60 pages leases have very detailed requirement of what the landlord must upkeep, and what legal remedies they have available if landlord doesn’t.
Also, I’ve researched how much would it actually cost to move garbage, do HVAC, and repair, I do believe the possibility is there.

The upside after making adjustment would be the building can worth around $450k, with $35~40k net, but the risk is there that if one key tenant moves, this building would become a charcoal that burns my ass when I sleep at night, and I’ve learned that this is not a scenario i should put myself in. So, after the initial excitement, I would probably submit an offer at around $200k, if I have 20k down payment to throw around. I may or may not depends on how my other 2 offers pans out.

Finally, I just want to mention that I believe I am moving ahead with a 9-unit apartment purchase, which will become my first commercial purchase. I am paying somewhat more than I would like to, and I admit one reason is because I am getting a bit impatient. But because of the things I learned here I still knocked down price by 40% of asking, which I would never be able to if I have not listened to what you wrote here. My first deal may not be a killer deal, but i bought it for the reason that I want can get some hands-on training in property management, and learn how to re-structure a poorly managed property. :deal

Rocking on :evil

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The seller’s stated numbers (36 mos of operating history) are what any bank will use to initially qualify a loan…

Beyond that, and you’ll have to prove that the building can be operated more inexpensively.

Never mind the seller’s numbers don’t include taxes and insurance…

You’ll be required to put up more than 10% down, on a building this old, and/or with anything close to these operating numbers.

The fact is, you won’t get conventional financing, using the seller’s numbers. They will HAVE to look significantly better than this.

This makes me believe that a strong buyer could come in and pay near full-price with private cash, let the leases run out, subsequently lower the expenses, and continue filling the building with private professionals, until it’s full, and operating profitably.

It would seem as long as the government’s occupying the building it can never be operated profitably.

Meanwhile, to a stronger buyer, the seller’s numbers will have less bearing on the financing (if any), as the buyer expects to lose money repositioning the property.

Just saying.

BTW, even though this building is well-maintained, it’s also 50 years old. By most bank definitions, this would be considered either a C or D class project. This alone will usually dictate higher interest rates, and shorter terms.

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you misunderstood Jay, the government require a non refundable deposit cheque with submitted offer, all I was saying is if i am making a lower offer, i might as well make the deposit strong. So I will submit a 20k deposit. The reason I make 200k offer is precisely because I don’t expect any conventional bank will lend to this.

but it’s good to know that the bank will classify building solely based on its age…seems lack of common sense but i guess that’s bank.

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OK, yes I misunderstood the $20K part.

In the future, if you’ve got access to the $200k, blow the seller away by offering the total purchase price as the deposit, subject to standard due diligence. BOMBS AWAY!

i believe that you’re not gonna be the only person bidding on this deal, especially since they’ve exposed it to the MLS, and won’t take offers for a month, or whatever.

So, it would be wiser to come in with the largest deposit you can scratch together, in order to launch a bomb across the bow of any competitors. Coming into the negotiations with your best shot, and heaviest fist, and you’ll better capture the seller’s attention.

If/when they reject your price, then you can come back with a standard deposit. Anything higher than $200k is now no longer the deal you were willing to “risk” $200K for, etc.

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good point. BOMBS AWAY ***giggle… :lol chief booger picker…:lol
Be sure to let me know when your “How to be a Landlord” book come out, I will buy it. In fact, please let me know how I can send $100 to you for a pre order. seriously.