Leasing decision on a mixed use building with one storefront dark since spring

Picture a corner building under contract at $1.15M in a walkable inner-ring suburb, closing in five weeks. Six one-bedrooms upstairs, all leased, average $1,050 and probably $100 under market since the seller hasn't touched rents in three years. Ground floor has 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. Underwriting the vacant bay at $16/sf NNN, matching the broker's comps, with nine months of downtime and $35/sf of tenant improvement money works out to about $63k of TI plus roughly $22k of lost rent before a first check arrives. When residential alone covers debt service at the quoted terms, even barely, the retail becomes upside rather than survival, which is the stronger position to underwrite from. The real decision is what to sign right after closing. A nail salon operator willing to pay $12/sf gross on a five year term, wanting a small TI contribution, could sign in 60 days and start almost immediately, de-risking year one. A coffee roaster wanting the corner glass, willing to pay closer to $18 NNN, needs a grease interceptor and a longer permit path and won't commit before spring, but changes what the building is and likely what the apartments rent for. The salon option de-risks the near term. The coffee option is the one that changes the building's trajectory, and its value is hard to quantify without inventing a number. Before signing either, it's worth checking parking availability for a food tenant, the condition of existing grease trap infrastructure if any exists, and how the residential rents nearby have responded to similar ground floor upgrades.

tylerbrooks9 AO1APRO 10

Answer

renee_dubois PS1APRO 12

Two things I would check before weighing the tenants against each other. First, the grease interceptor question goes past cost to whether the building can take one at all. Take a typical small mixed-use building where the ground floor waste line ties into the same stack as the apartments. Putting a food use in there can mean cutting the slab and running a separate lateral, and quotes on that work tend to start around $18k and end 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 is a slab cut, your $18/sf NNN is really $18 minus a big one-time number, and the salon closes the gap fast. Second, the $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 it comes from turning units rather than from winning a leasing negotiation. That is a bigger and more certain swing than the $6/sf difference on 1,800 sf. 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 the landlord eats the CAM, and on a two-bay building with a shared parking lot and snow removal, that is real. If you take $12 gross, price your operating expense per square foot first and see what $12 actually is net. On a building of that size $4.10/sf is a plausible load, which would put $12 gross closer to $7.90. What does the insurance agency pay in CAM today, and is there a bump at renewal?

renee_dubois PS1APRO 12

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