For the purposes of this discussion, we will use the term “investor” to mean someone that purchases a property with the goal of improving it and operating it. Optionally, the investor may sell the property, either in the short-term or at an arbitrary time in the future.
In this scenario, looking at the Post Office building today, post remediation, the investor would primarily be concerned with its structural integrity and its size (approximately 15,000 square feet). The structural integrity is not at issue; the building is the newest in the Village and built to 1950s federal standards. In addition, it has been well maintained throughout its life by the same tenant, the US Postal service. Aesthetically it appeals at varying levels to personal taste, but as an investment it is a sound structure in a prime location.
Putting aside the possibility of adding a floor to the structure (a net increase in usable space of 50% of more), an investor might estimate renovation costs to be about $1 million. This would serve to modernize the building and make it ready for interior fit-out to meet tenants’ needs. It is significant to note that the existing building is 11,000 square feet of open space with exposures on four sides, and that the basement is similarly 4,000 square with southern exposure, and pre-existing at-grade access. The interior walls in the basement are non-load bearing, greatly reducing the cost of renovations on that level.
The investor might seek a single tenant (perhaps Kings supermarket), or could readily adapt the space to a variety of uses with multiple tenants. With proper planning, the renovations could be done to facilitate easy future adaptation of the interior, allowing it to be responsive to market and demographic variations for the foreseeable future. Most all envisioned uses would not require zoning changes, as the site is already zoned appropriately. A plan could be prepared within a few months, and the building ready for tenants in under a year (unless options such as a second floor were planned, which might take a bit longer).
At a purchase price of $1.25 million, and a renovation budget of $1 million (a reasonable estimate, based on cost of $70 per square foot), an investor would spend about $2.25 million preparing the Post Office for new tenant(s).
Rents in Maplewood Village vary widely, from the low 20’s to around $50 per square foot. Joe Forgione, owner of JMF Properties, has estimated he will charge $30 per square foot for his retail space. Using that figure, an investor would collect about $450,000 per year rent on the renovated Post Office structure.
With $2.25 million invested, the investor would be enjoying a return of about 20%. Of course there would be expenses to be paid, but commercial leases are generally “triple net”, meaning that tenants pay most expenses (repairs, taxes, insurance, etc).
This is an astounding number for a location that has so little long-term risk. Part of the reason is that the US Postal Service, under its extended lease, was paying, effectively, about $11 per square foot–one-third the rate used in this example.
What about taxes? By comparison with the JMF proposal, the existing building has nearly sixty percent more commercial space. Tax rates per square foot are generally much higher on commercial space than residential, so the larger space can offset most, or all of the taxes that would be collected from the twenty residential rentals that JMF plans. The net difference, whether positive or negative, would be a truly negligible portion of the total Maplewood budget–that is, a small fraction of the amount that taxes vary each year for all other reasons.
Given the enormous potential return on investment, it is easy to imagine a local investor taking on this project, and easy to imagine that the dynamic between the investor’s business model and the community would be much more accommodating than that with the business model of a developer. This stems in part from having avoided destruction of the pre-existing asset on the site.
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[Thanks for reading. The numerical examples on these pages are based on rules of thumb widely accepted by the commercial real estate market and have been reviewed by a licensed broker. Names have been removed to protect the writer.]
Oh No 60 