You Make Your Money When You Buy

A drone video of our building at 1908 W. Northwest Blvd.  No music, but it's got some cool shots of the building and the surrounding Spokane neighborhood.

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I’d kept my eye on a property on Northwest Boulevard for months.  It was listed for sale by another brokerage firm and had been on the market for quite a while.  One February morning in 2013, the “For Sale” sign disappeared and I panicked. 

Had the property sold just as I was starting to get excited about it?

THE BACK STORY

The property was a former tire store that had been purchased in 2005 for $285,000 and completely renovated into a three-bay retail building.  It sold in 2006 for $725,000.  Pay attention to the sale date as we all know the disaster looming on the horizon.

The building in 2006 had a cell phone retailer, a small coffee shop and a payday loan company.  The coffee shop quickly failed and was replaced by a burrito restaurant.

Here’s the math on those tenants.  At the time, they were in the building paying $16.00/SF + NNN.  Assuming the NNN’s were roughly $3.50/SF, the tenants were paying $19.50/SF to be in this building. That was completely over market in 2006.  It would be completely over market now.  That alone was a disaster in the making but it was about to get worse.

In 2008, the market turned and the recession took hold.  These tenants would struggle to hold on.    

In 2010, Spokane City tore up a 2 mile stretch of Northwest Boulevard to repave the road and install a new water main.  This took almost the entire construction season.  A lack of traffic wiped out the cell phone company and the restaurant.

Also in 2010, Washington State changed the way payday lenders could conduct business in the state.  Payday lending stores started shuttering almost immediately.  This was one of them that closed.  The industry is now almost non-existent in the state.

Initially, the building owner tried to sell it for $790,000.  No one was buying and no one was lending at this time.

Then he dropped the price to what he paid for it: $725,000.  Still no takers.

He continually slashed the price until it was listed at $525,000.  The property was foreclosed in March of 2012.

HOW WE BOUGHT THE PROPERTY

Due to this being an active deal with partners, I can’t discuss lease rates, terms, etc., but I will share how we put together this project and what we learned.

When the bank recovered the property, they listed it for the same $525,000.  It sat there empty.  They tried to lease it for months as well with no takers.

Finally, they dropped the price to $390,000.  It looked interesting, but a funny thing happens when a property sits on the market for too long.  It blends into the background and investors start to lose interest.

I had just rediscovered the property and started working the numbers to see if it would "now" make sense.  Then came the day the “For Sale / For Lease” skid sign was removed.  I called the agent representing the property and asked if it had sold.  He told me it hadn’t and that they had just leased the property to a non-profit charity for one year just to get someone in the building, he said.

I breathed a sigh of relief.  At $390,000, the building finally made sense.  The rents needed for that price were justifiable even as the economy was struggling to get out of the recession. 

Before I made an offer on the building, I brought two clients by and asked them if they wanted to purchase it.  I had long standing relationships with both of them and if they wanted the building, I would have stepped out of the way.  Each of them said the numbers worked, but it was a bit smaller than they wanted.  They told me I should purchase it for myself. 

I wrote an offer and sent it to the other broker.  Unfortunately, the bank declined because the non-profit was now a tenant.  I couldn’t believe it.  Neither could the other broker.  The non-profit was paying $300/month for the whole 4,000 SF building.

I wasn’t going to be deterred.  I kept after the building by contacting the broker every week until the bank called me directly.  They finally revealed that they did indeed want to sell the building, but they didn’t want to disturb the tenant and risk the bad press of selling it quickly after having leased it to the charitable organization. 

I assured them that I would work with them and figure out a way to make everyone happy.  It took several weeks, but we finally agreed on a deal.  I would pay full price, $390,000 and we would delay closing until the last day of the year, which would mean I would only have to deal with the non-profit for three months.  The bank would get a win because they could write the property off their books in 2012.

This meant I had six months to put together an investor group and figure out how to tenant the building.

First, my due diligence went smoothly except for a roof issue.  It was in terrible shape.  The bank agreed to replace it prior to closing.  We worked together, got several bids and they selected the contractor.

Next, I pulled my investing partner, Kevin, in to the mix.  He’d already had a couple of guys looking to buy a building to relocate their business.  They walked the property with us and then listened to how we’d structure the deal.

SPVV Landscape Architects would take half of the building, leaving us with two roughly 1,000 SF bays left.  We put together a flyer and blasted it out. 

As we approached the end of the year, we didn’t have any takers yet for the space, but we’d had a lot of activity.  Our lender believed in us due to our track record with them and approved the deal.  We closed on right before the end of the year.

Now, we had a quandary.  The non-profit was still in the space for another three months and we wanted to get to work. 

We offered the non-profit a buy-out and they accepted.  We paid them to leave the building three months early.  We gave them a check and a week later, they were completely out of the building.  It was worth every penny.

The landscape architect firm went to work and completely renovated their space.  They cut in a couple windows to allow more light in.  They completely updated their unit which came out beautifully.

Two new tenants were brought to the building by outside brokers.  A new coffee shop (Ephata Café) started in the middle bay while and Allstate agent took over the end cap.  While they worked in their spaces, we went to work on the exterior of the property.

We painted the building, giving it a new and modern paint job.  The pylon sign was fixed and changed to feature only three tenants.  We re-striped the parking lot, actually adding two spots by using a professional who figured out how to properly set the spots.

The biggest impact of all, though, was the landscaping.  When we took over, the landscaping was just mud.  It hadn’t been maintained in a couple years.  We had to start over from scratch.  Our partners, working with a landscaper, had new grass installed as well as elements that highlighted the property. 

It was great turn-around for the property.

LESSONS LEARNED

You Make Your Money When You Buy

Unfortunately for the previous owner, this was a clear example buying wrong.  They bought the property at the height of the market.  When the market turned and other forces worked against them, they couldn't recover. 

We bought the property for almost half of what the previous owner paid for it.  We're afforded far more flexibility with how we operate our property because of how we bought it.  We paid the right price and set the correct lease rates for our tenants.  We've ended up with a beautiful building, a nice tenant mix and a successful partnership.

Keep Asking Questions

It is said that “everything is negotiable” so don’t be afraid to practice that.  When the bank said they didn’t want to sell the building for a year after they put the non-profit in, I didn’t want to accept that answer.  At first, I offered to give them a provision whereby I wouldn’t remove the non-profit until the end of their lease as long as the non-profit fulfilled the obligations of their lease.  The bank didn’t like that concept so I kept trying.  I later said I would pay full price and buy the building at the end of the non-profit’s lease.  That’s when the idea took hold and the bank got interested.  I sent an offer back over to them exactly as was discussed.  The bank actually countered the closing date and said they wanted to close before the end of the year to get it off their books.

If I would have accepted their first “no,” I would have missed out on one of my favorite properties.

Don’t Take Too Long to Make a Decision

When the Northwest Boulevard property finally dropped to a price that I thought made sense, I didn’t spring into action.  Instead, I ran some numbers and thought about it.  I was slow and indecisive.  I believe this was due to the number of times I’d looked at the property before and it hadn’t made sense. 

By taking too much time, the bank had put a tenant in the building which delayed our purchase up to a year.  In hind sight, maybe this was for the best as we ended up with a fantastic partner and a great building.   However, I learned to take action quicker as a result of this project.

Set the Appropriate Lease Rate for the Tenants

One of the biggest lessons out of this was to price the building correctly for our tenants.  The previous owner had purchased a building with over-priced leases in place.  This meant, the tenants were set to fail before the market began to collapse. 

We looked at the neighborhood and realized our building wouldn’t attract national tenants.  We were going to get local tenants, most of whom wouldn’t want an NNN lease and would balk at signing.  We developed a pricing structure on a modified-gross lease (all costs rolled into a single rate).  Prospective tenants could easily understand our asking rent and we were full almost immediately.

Have you made money when you bought?  Or lost money?
I'd love to hear from you.