A Burnt Out Mixed Use Building, Another CRE Cigar Butt

Mac was the first GC that we brought to our 2nd Street project. He started years earlier in the trades as a framer and had gone on to build hundreds of homes in his career as a GC. When we arrived, Mac pried the plywood covering off the door frame and peaked into the fire-burned apartments, without missing a beat he said “the firefighters got here a minute too early.”

In other words, it would have saved everyone a lot of trouble if the building just burnt down entirely. But I knew there were profits to be had. My youngest brother Brendan brought us this 2nd Street deal. The asking price was $300,000 take it or leave it. A couple of brokers in his office had bought the property for $465,000 from a long time owner only 5 months before selling it to us. A tenant that they inherited accidentally started the fire. These brokers were great at buying right but none of them had my rehabbing experience. I took the offer and we bought the building for $300,000.

It was a two story building. The second floor had three apartments. The original floor plans were obsolete and potential habitable square footage had been lost to excessive hallway space. Lucky for us we’d be starting from scratch on the second floor!

The first floor was retail and had been occupied by a flooring retailer when the fire struck. The building sat on a major arterial road in the city of El Cajon in San Diego County. It also came with a billboard leased to CBS Outdoor (now Outfront Media).

Here’s the billboard on the property. It’s nearly impossible to get new one’s put up in San Diego County.

This was my first deal with a retail component and the only reason I made the leap was because our total costs into the deal would be such that, if I backed out the capitalized value of the renovated apartments and the capitalized value of the billboard lease, we were getting the retail for free.

While in contract, we interviewed prospective leasing brokers. I knew I had no business leasing retail space and we found a broker that leased a lot of comparable retail in East County San Diego.

In brainstorming with him we concluded that given the neighborhood demographics vs the existing retail in El Cajon, a concept like a used baby store was ideal. Our leasing broker had a prospective tenant, the demand was there from people in the community given that baby accessories and toys are expensive but used for such a short time period creating a financial burden on many families to buy them new. We set a meeting up with the city and were told “no consignment or second hand stores.” They flat out would not let us lease to the type of store that their community demanded.

We hired an architect that my partner on this deal had worked with previously. At least I thought he was an architect. He had an office across from El Cajon City Hall and it literally said architect above his door. He told us he knew everybody at the city and could get our plans approved quickly–~10 weeks later our plans were approved. It’s easy for me to sit here and blame others but the fact of the matter is, I was pushing the limits of my capabilities on this project. I had only hired a couple of architects, draftsman and engineers ever, at this point in my career. I just did not know all of the right questions to ask or issues to think about.

In fact it was six months into the project that we learned that an architect had occupied the same office before our “architect” and our guy just never got around to removing his sign. Okay. Like I said, we hired a draftsman to help us with the plans along with a structural engineer.

We ended up hiring a GC that we worked with on a lot of our SFR rehabs. He was comfortable with the job and bid $190,000. So how did things work out? In the end, including architectural and permits we spent $225,000 renovating the building. Our leasing broker never found a tenant. He came close with a group that wanted to set up a boxing club but there were some critical posts in the space that interfered with the location of the ring.

I listed the property for sale myself. A buyer’s agent brought us a buyer that intended to move his family into the second floor (as leases rolled) and occupy the first floor for as bodega that they would operate. The perfect buyer.

We sold the building in March 2015 for $900,000 for a ~38% unlevered internal rate of return over our nearly 2 year hold. I learned a lot on this project about working with engineers, draftsman and cities. If I were to do it again, I’d still sell the building but I would have 1031’d into an apartment deal in a Class A or B neighborhood.