Bought the building for the dirt under it, and the rent turned out fine

The listing was a 9,200 sf single story office on 1.4 acres in an inner suburb, built 1978, three tenants, asking $760k. I looked at it because of the land, not the leases. The parcel is zoned in a way that allows a lot more than a one story building with a big surface lot, and the county assessor had land alone at a number that was more than half the asking price.

What I paid: $665k, so about $72/sf on the building. Tenants were an insurance agency, a small accounting firm, and a title office, all on gross leases with rents between $13 and $15/sf. Gross lease means the tenant pays rent and the landlord pays the operating costs out of it, so my number that matters is what's left after taxes, insurance, utilities, and maintenance.

Year one collected rent was $118k. Operating costs ran $54k, higher than the seller's sheet because he had no line for the parking lot or for vacancy. Net was about $64k. Not thrilling on $665k all cash, but it's positive, and the tenants have been in the building longer than I've been investing.

The part that nearly broke it was the roof. Inspection called it five years of life, my roofer called it two. I held back $40k at close and spent $31k in month eight.

What I'd keep: buying where the land carries a real share of the price. If the office use goes away in ten years, I still own a corner of a suburb. If I'd paid $72/sf for a building on ground worth nothing, the whole bet would be on leasing an old building forever.

4 replies

2ryanmck27SC2C

The roof holdback is the bit I'd copy. Two inspectors, two numbers, and you assumed the worse one was right. Did you write the holdback into the purchase contract or just budget for it yourself out of reserves?

2laurenkim53Passive

Same shape works in small towns but the land half doesn't. Out where I look the dirt under a 1970s office building is worth almost nothing because nobody is building anything on it, so you really are betting on leasing an old building forever. Your deal works because of where the suburb is, and I'd hate for someone to read this and go buy a $60/sf building on a county road thinking they're protected.

1nicole_adeyemiPassivePRO5

Check what the zoning actually permits by right versus what needs a hearing. I've watched people price in redevelopment value on a parcel where the underlying use was allowed but the density and parking minimums made anything larger impossible without a variance, and variances take years and sometimes never come. Also worth knowing whether your county reassesses on sale, because in some states that alone moves the tax line enough to eat your $64k down to $50k. Different in every state, so read your own.

But the general instinct is right. Rent from a 1978 office building is a depreciating income stream. The parcel isn't.

1mikeoconnell7SP2APRO6

Three tenants at 3,000 sf each is three separate re-leasing events, and small professional tenants move for reasons that have nothing to do with your building. What's your assumption for downtime between tenants and who does the leasing, you or a broker at 4 to 6 percent of the lease value?

Bought the building for the dirt under it, and the rent turned out fine

4 replies