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Now, let's talk about today's topic.

Have you wondered why these retail single-tenant vacant deals are so cheap?

It's one of the following: a former bank, a fast-food restaurant, a daycare.

Another business that went dark.

Some of them are decent-looking properties in densely populated areas.

Many are 10 to 20 cents on the dollar compared to its replacement cost.

So why don't we see a ton of buyers jumping on them?

Let me share about a 15,000-square-foot deal on 0.46 acres I bought for $775,000 in January 2021.

It was an automotive property on 5805 S. Archer Avenue, Chicago.

On paper, at $52 per square foot, it looked amazing.

It's right next to Midway Airport. Approximately twenty thousand cars pass by each day.

Within 2 miles, the average household income is $83,000, and the population is over 80K.

I've got this deal from a direct mail campaign for industrial buildings. Somehow, this retail-automotive property ended up on that list.

Seller Bob had been running A-OK Automotive in his building for over 30 years. But, was going to shut down.

He wanted a confidential sale and close within 90 days.

After that, he would lease the property for six months and then leave. In other words, I was buying an empty box.

Now, lease comps for this type of building were $8 to $12 per square foot (NNN). They traded at +- $100 per square foot when fully occupied.

I looked up brokers for QSRs (quick-service restaurants) and automotive lease deals within 10 mile radius.

Feedback was that automotive would be in demand if I cut the building up into smaller units.

For a national QSR, my site is too small. They need at least one acre.

I felt safe to move forward with the deal.

We've closed with a hard-money lender with 20% down at 11%, 2 points and a 12-month term.

Right after I met with Bob's general manager, Ricardo. He showed interest in leasing the property from me.

One problem was that he didn't have much cash for operating costs and equipment that Bob was selling.

We put a deal together. I bought the remaining equipment from Bob for $25,000 and financed it for Ricardo at $2,000 a month.

And we've written a 10-year lease at $7 per square foot, NNN, with 3% bumps.

It took almost six months to put this lease together.

During that time, I had to make a few improvements. I replaced half of the roof and tuckpointed the building. Approximately, we've spent close to $80,000.

In six months, the lease had seasoned. We've refinanced the building with Heartland Bank and taken out 90% of our basis.

Within another year, we've listed property on the market at $1.4 million, but got offers in the mid-$1.2 million range. It didn't sell.

After listing expired, we've ended up selling to our tenant for $1.2M.

We had provision with Marcus and Millichap, which states that no commission is due if it's sold to them.

Ricardo financed it with an SBA loan from the same Heartland Bank.

We've made $338,000 in profit on this deal, which took over 2.5 years to complete.

All set and done, I'm very happy that local business didn't shut down. And I was able to sell the building at a fair price.

No doubt, this is a good amount of money. But, given the time, complexity, and opportunity cost, there are many easier deals for me.

This deal was outside my normal wheelhouse; I usually do multitenant industrial deals.

The positive side of this business model is that there is so much less competition.

If I do it again, I would do it only if I were buying many deals at once.

It would be a portfolio of deals in many locations.

And I'd operate it, for example, like a building with 10 tenants: 7 fully leased, 1 in renewal, and 2 vacant heavy lifts.

This way, it would be no problem to carry vacant units from portfolio cash flow.

We could focus on acquisition and leasing for these type of deals only. And build a system around it.

Here are the steps to find these deals.

I would build a list of buildings up to 15,000 square feet on 0.5- to 2-acre sites in dense urban areas owned by owner-users, which they have purchased 15+ years ago. I would remove all national credit tenants.

And I would do an old-school direct mail campaign.

I bet you would be the only letter in the mailbox with an offer to buy. As opposed to one of many dozens if you're chasing industrial or apartment deals.

Takeaway

If you're in the beginning of your career, I would stay away from these types of deals.

Once you own 10-20 of these types of properties or buy them all at once, it could be a great business model.

It comes down to that - you can master anything, but you can't master everything.

To remove friction and get to some sort of scale, you need to zoom in on focus.

P.S. The Deal of the Week goes to that 45-story BP Tower buyer who snatched it for $54 million.

Just in 2018 same tower with parking garage sold for $190 million.

P.P.S.

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