My office is an old retail ground floor spot. From that spot I witness the comings and goings of the Jefferson Park commercial area. One day, a casual acquaintance named Matthew and I bumped into each other in our favorite neighborhood coffee shop. I sponsored and participated in the Jefferson Park Farm and Flea market and Matthew was a frequent visitor to my booth where I posted photos of my development projects. Matthew was polite enough not to give me the stink eye over my developments. We used to also see each other at the Registered Neighborhood Organization meetings.
One day he stopped me on the corner and said he wanted to talk to me about a development project. One month later he came to my office to meet with me and my general contractor. Matthew owned a 28,000 square foot lot with 7,900 square feet of office space on Sloan’s Lake where he ran his consulting business. The building was dated, but in good shape.
Matthew wanted to develop his land and was searching for investors, a financial analysis of a potential deal, and a path forward. We knew that any property with frontage on Sloan’s Lake had some intrinsic value, but exactly how much, we were not certain. The south side of the building was one-story while the north had two. Edgewater had just down-zoned his property from 35’ height to 25’ (three floors to two floors). He also had $700,000 in debt. The three of us spent three hours running the numbers but we could not get them to work. He needed a guarantor for the financing and another investor. The ROI was inadequate. At the end of the meeting Matthew left disappointed.
I was trying to be as transparent as possible, whether I would get a job or not.
A month later he called and said, “Let’s sell it.” He advised me that the sale had to be discrete and off-market because he would need until the end of the year to wind down his business.
There were comps available but not exact. There were old, nasty buildings, and new ones with national credit tenants. The rents varied from $12 NNN to $20. I used $15 NNN in the valuation and that gave him the $2 million asking price he wanted.
I called some investors and sold it for the $2m asking price. My investor-client said, “I don’t know why I like it, but I do.”
Getting to closing was the challenge. I wrote a contract with a closing in December, six-months away. The contract gave the buyer 45-days to conduct due diligence that consisted of building inspection, a Phase 1 environmental review, and a survey. All passed.
My investor hired an architect to design a floor plan for a restaurant with a rooftop deck. The plot had 28-parking spaces. The plan was for a 4000sf restaurant, 2500sf patio and 3900sf of offices. When the plan was presented to Edgewater their response was “You need one more parking space. To get a waiver for the one parking space, you will have to have a full community review.”
This was a project that would bring in thousands of dollars in tax revenue and provide a service and venue that was missing, but Edgewater would not give us the flexibility needed. Edgewater had hired “experts” from other municipalities since they had none of their own.
This response from Edgewater gave the buyer a lot of heartburn. He told me, “Hit ‘em with a $200,000 reduction.” Matthew agreed to $100,000 and old at $1.9 m.
My buyer had lots of options. He could have gone through the full committee review with Edgewater. He could have rented at $15 NNN it would have generated a 5.5% cap rate. If the buyer had done $40 per square foot in the remodeling of the building he could have rented it at $25 NNN and that would have generated a net operating income (NOI) of $181,000 and an 8.2% cap rate. If he had sold it at 5.5 % cap rate he would have generated a million-dollar profit.
The buyer was wavering right until the closing date. He closed on it Dec 15. In February he got an unsolicited offer of $2.3m. Now he is leasing it at $28 NNN after $30,000 of tenant improvements.
Purchase Price: $1.9 million
Tenant Improvements: $30,000
$28 NNN X 7900 square feet $221,000
NOI = Cap Rate X Value
$221,000/ 1,930,000 = 11.4%
Matthew took his money. Moved to a co-working space for him and his wife. He now travels and drinks wine.
- A great example of what you can do with $600,000 in cash. Buy it, do some improvements. Gives you an opportunity to do value-add. Hold it for two years, 1031 Exchange, re-finance, buy another.
- Denver homeowners with trapped equity can do this. If you have owned for a decade you probably have an opportunity.
- Work with an expert