WinIndustrial / Warehouse (Passive Hold)

My first industrial is leased to a cabinet shop, and the shared yard rule almost sank it

I bought a 4,200 square foot end unit in a six unit light industrial condo park in a mid-size midwest market. Purchase price $395,000, so about $94 a foot. The tenant is a cabinet shop that's been in the space eleven years, with 5.5 years left at $9.25/sf on a lease where they pay taxes, insurance and their own maintenance. That's $38,850 a year in rent. I'm holding back for vacancy and reserves, so I underwrote NOI at $34,000, which pens out around 8.6 percent on the price.

Debt: my lender quoted 7.1 percent on a 20 year amortization with a 5 year term, 30 percent down. Everyone's terms differ and mine were quoted in writing, so don't read that as a market rate.

The part that almost killed it. The park is a condo regime with recorded CC&Rs, and I read them the second week (I read everything twice, which is the one habit that's paid off so far). The rules limit overnight trailer parking in the shared truck court. My tenant leaves a 28 foot trailer there most nights. Nobody had complained in eleven years, but nothing stopped a future board from enforcing it, and that trailer is how the shop takes in sheet goods.

So I asked for a tenant estoppel and a letter from the association confirming the current practice, and I made both conditions of closing. The association letter took nine days and pushed my close a week. I got it.

What I'd keep: reading the CC&Rs before the inspection, not after. The physical building was the easy part.

Answer

3tashaford30PB2APRO7

@anchor's downtime question is the right one, but @juniper, the thing I'd want you to lock down now while you have goodwill is the paper trail on that yard.

An association letter confirming current practice isn't the same as a right. Boards change. Three things I'd chase in your first ninety days:

First, get the association's actual enforcement history. Minutes, violation letters, anything written. If the trailer has sat there eleven years with no notice on file, that's worth something to a future buyer.

Second, look at whether the CC&Rs allow an amendment or a variance recorded against your unit. Some regimes permit a recorded exclusive use of a portion of common area with a board vote and a percentage of owners. Whether that's available to you depends on the document language and on state condo statutes, which differ state to state, so have a real estate attorney in your state read the regime before you spend money chasing it.

Third, when the lease renews, put the trailer in the lease as landlord's permitted use subject to the CC&Rs. That way the risk is spelled out on paper instead of sitting on you alone, and the tenant knows what they're relying on.

On downtime: for a unit that size in a secondary market I'd carry six months vacant plus a couple of dollars a foot to make it generic again. Pulling out a spray booth isn't free. At $34,000 of NOI, six months down plus $10k of work is $27,000, roughly ten months of income. Your 8.6 goes to a 7 for a year and you're fine. That's the test.

4 replies

3ehernandez74PO2BPRO5

Congrats, that's a clean first one. My question is the one I always get stuck on: what happens at year 5.5? A cabinet shop with dust collection and a spray booth has real money sunk into that unit, which is good for renewal odds. But if they do leave, who's the next tenant for 4,200 feet and what does it cost you to get them in? Did you put a downtime number on paper before you signed, or did you decide the price was low enough that it didn't matter?

1tylerbrooks9PassivePRO5

This is the version of industrial I actually want. Small, one tenant who cares about the space, rent under nine bucks so a replacement tenant can afford it too. Nothing here needs me to be clever.

2brandonlee36Passive

One thing from running a small portfolio: your reserve number is going to feel generous until the first big item lands. On a unit in a condo park you're partly protected because the roof and paving usually sit with the association, so check the association's reserve balance and its assessment history. If they've never raised dues and never funded a roof, that's your capital call coming, not theirs. Ask for two years of association financials if you didn't get them.