One of the two storefronts has been dark since spring

Under contract at $1.15M on a corner building in a walkable inner-ring suburb, closing in five weeks if I don't kill it. Six one-bedrooms upstairs, all leased, average $1,050 and probably $100 under market because the seller hasn't touched rents in three years. Ground floor is two bays. The 1,200 sf bay has an insurance agency at $14/sf modified gross with 14 months left and no renewal option. The 1,800 sf bay has been empty since spring, last tenant was a sandwich shop that closed.

My underwriting has the vacant bay at $16/sf NNN, which is what the broker's comps say, with nine months of downtime and $35/sf of tenant improvement money. That's about $63k of TI plus roughly $22k of lost rent before a first check arrives. Residential covers debt service on its own at the quoted terms, barely, so the retail is upside rather than survival. That's the part I like.

What I can't settle is the leasing decision I'll be making the week after closing. There's a nail salon operator who has said $12/sf gross, five years, wants a small TI contribution, could sign in 60 days. There's also a local coffee roaster who wants the corner glass, would pay closer to $18 NNN, but needs a grease interceptor and a longer permit path and won't commit before spring.

Salon money starts almost immediately and de-risks year one. Coffee changes what the building is and probably what the apartments rent for. I don't know how to weigh the second thing without inventing a number for it. What would you check before you signed either one?

Answer

1renee_dubois Get yours

Two things I'd check before you weigh the tenants against each other.

First, the grease interceptor question isn't only cost, it's whether the building can take it at all. On a small mixed-use building I own, the ground floor waste line ties into the same stack as the apartments, and putting a food use in would have meant cutting the slab and a separate lateral. My plumber quoted a range that started at $18k and ended with a shrug. Get a camera scope and a plumber's written opinion during your inspection period, not in March when the roaster is waiting. If it's a slab cut, your $18/sf NNN is really $18 minus a big one-time number, and the salon closes the gap fast.

Second, your $100 under market on the apartments is worth more than either retail scenario in year one. Six units times $100 is $7,200 a year, and you get it by turning units, not by winning a leasing negotiation. That's a bigger and more certain swing than the $6/sf difference on 1,800 sf. I'd model the retail bay at the salon number and treat any coffee outcome as a thing that happened, rather than a thing you paid for at closing.

One caution on the salon lease. Gross means you eat the CAM, and on a two-bay building with shared parking lot and snow removal, that's real. If you take $12 gross, price your operating expense per square foot first and see what $12 actually is net. Mine came in at $4.10/sf on a similar building, so $12 gross was $7.90.

What does the insurance agency pay in CAM today, and is there a bump at renewal?

One of the two storefronts has been dark since spring

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