Commercial Building Case Study

We will be closing on a commercial building at the end of June. We are pumped! This is a mini case-study to explain our thought process and analysis on why we think we have found a way to make a good deal a great deal.

For the purposes of this mini case-study, we will not get into all the details. But we wanted to share some of the unique features of this deal that have caused it to be great for us.

                This is a 16,500 sq. ft. office building in Madison TN (15-20 mins to downtown).  The purchase price is $1,400,000. The entire building is completely vacant! Yes, that is pretty scary. And it is one of the reasons why the seller could not find a buyer at this price.

                If you know someone who needs a good deal on office space 15 minutes from downtown Nashville, I know a guy….

                But below are some of the ways that, without changing the price, we made the deal so much better for us than any other potential purchaser was able to do prior to our offer.

1.       SELLER FINANCING

First off, we were able to negotiate seller financing on this purchase which was great for us. The seller was sticking to her guns on price. She was not accepting anything but a full price offer. So… I made a full price offer.

But here’s the catch!!! After we walked the property, had built some rapport, and genuinely expressed admiration for the building and a desire to purchase, I asked one question: “Do you need all of the money for the building now, or would you be open to taking some payments over time?” Guess what she said? “We really don’t need the money. We just want to sell, go back to Florida, and not have to worry about this building anymore.”

Here’s what my initial full price offer looked like - $1,400,000 with $75,000 down, $5,000 a month payment, with a balloon in 5 years.

Here is approximately what we agreed to: $1,400,000, with $100,000 down, $6,500 a month payment with about 4.5 % interest and a balloon in 5 years.

If we were going to buy this building with typical commercial financing, it would have probably required $280k - $350k as a down payment (20-25%). And the monthly payment would have been more than $1,000 higher. It may have been even worse terms since the building has zero income.

So, by allowing her to have her price, but by controlling the other terms of the transaction, we turned a decent deal into a great deal for us with seller financing. It turns out, no one had ever asked her about seller financing until I did – despite numerous interested buyers and multiple cash offers. It never hurts to ask, and sometimes it pays off bigtime.

2.       UNIQUE MARKET ADVANTAGE – BUSINESS “HOUSE HACK”

We have done 5-6 “house hacks.” This is where, by my definition, you either rent out part of your personal residence, rehab your personal residence for extra equity, or do something else creative to turn your primary residence purchase into a great investment. Here, we plan to use this as a business house hack. While we will own the building (in a separate entity), one of our businesses which needs office space will also be the first tenant!

While under contract, I spoke with several local commercial investors who had looked at the property and even made offers. They were looking to buy the property for a little less than what the seller was asking - in the ballpark of $1,250,000 to $1,300,000.

Here is the thing though … they all had the same plan. They were budgeting to turn the entire building over and lease it up to 100% ASAP. This means they had to account for a significant amount of holding costs and risk (in the hundreds of thousand of dollars) in connection with the building being entirely vacant.  Imagine buying ten single-family houses at once and all of them are completely vacant. You are going to need a steep discount or go broke.

Since we knew we would have a tenant on day one that could cover the entire debt on the property, we did not have to account for the property being completely vacant on day one. We also did not have to account for the same level of holding costs or risk that any other interested buyer did. We had a distinct advantage over other potential buyers in this regard.

3.       AMAZING TAX ADVANTAGES AS OWNER AND OCCUPANT

*Preface – I am not a CPA. I do not give tax advice And I don’t know what I’m talking about*

If you do not have a CPA, reach out to Clinton Hauser. He taught us this trick. Based on my extremely limited tax savviness, I’ve come to believe that this is the greatest tax trick with the exception of the tax-free sale of a primary residence (google 121 exclusion).

                Our business needs to pay rent somewhere. So, now we are paying rent to ourselves - technically to another entity. We have converted what was only an expense for our business and turned it into income for another business that we own. But we will pay no taxes on this additional income!

The income will be offset by depreciation and debt payments going towards the principal. What an amazing tax advantage! Once the income for the holding company becomes significant enough, a cost segregation can be done to further defer taxes on the rental income.

                Also, this means we can afford for our business to lease up a bigger space – or as much as is needed to help initially support the holding company. While this does raise expenses for the tenant business, it increases income for the holding company. AND… the tenant business no longer must pay taxes on what we are now turning from income into an expense. We will save about $35 in taxes to offset every additional $100 in rent, because this normally would have been reported as income.