Ep 29 - Co-Working Potential

Some interesting options for Thunderbird has presented itself.  Not quite sure how to take it all in, but has some potential.  Just like anything else, there's upsides and downsides to it all.  Would need to get more final info to make a decision on how this one will shake out!  

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Transcript

SPEAKER_00 0:00

Boys and girls, welcome back to the commercial real estate starting from scratch podcast with me, your host, John Kleisch, on episode number 29. If this is your first time tuning in, really appreciate you doing so. Would love to hear how you found out about this place. To give you an idea of what this podcast is about, I am documenting my journey into the commercial real estate space. Uh, named it starting from scratch because your boy here had no experience in commercial real estate, no owned commercial real estate, and thought it would be cool to document the process from the very beginning all the way up until however far we end up uh taking this thing. Knowing me, I will be buying lots of buildings and will grow a decent sized portfolio. So it would be cool to uh have my listeners uh watch me get bigger as we go and everything like that. And I feel like most people tune in here just to listen to my pain and suffering. So here we are. Uh oh, I guess a little bit more about me. Uh, you know, uh Phoenix, Arizona. I own started this podcast with zero dollars in commercial real estate, and now I own two commercial buildings. One is an industrial building that is mostly for automotive tenants, and then the other one is an office building in Sun City, Arizona. Uh valued uh somewhere around two and a half million dollars. I feel like it changes every day, but I'm just gonna stick with two and a half million dollars until we get a much more solid valuation, and then I can bump up that number a little bit more, God willing. So this week's episode, what are we gonna talk about? Thunderbird. I feel that uh I got some good updates to to speak about here, and pretty interesting. Uh, what I like about this is that it lets me kind of speak out loud in my thoughts to uh put my thoughts out there to see if that kind of makes sense. I know in the past I've made up my mind on certain things, made a podcast about it, and then I was like, you know what, I'm gonna change my mind. So uh Thunderbird has been going uh you know slow, but was expected. I always need to tell myself that because I knew that this was not a building that was going to be leased up right away. I know that office in general is a little bit slow, especially Sun City office and the type of office that we have. I knew it was not going to be something that would get leased up right away. However, now living through it, living in it, and uh it hurts. It does, it definitely does. But neither here nor there, we've had two interested parties where they went out and saw the place. The first guy, uh nationally credited sleep center, ended up just completely ghosting us. So I imagine they're not interested in leasing from us if the guy went dark. And then the second one, which came in, I believe I mentioned it on the podcast last week, from Regis, which is a national, I wouldn't call them a tenant, they do co-working spaces. I was under the impression that they go out and sign master leases and then lease up the spot and then they keep whatever profit they get from there. However, I think this is gonna be a really cool, interesting podcast because I learned a lot. My broker learned a lot, and it's an interesting concept. So, co-working, for those of you that don't know, uh, you know, this whole office is 7,781 square feet. This portion that is vacant right now is about 6,400-ish. And what they do is instead of leasing it to one tenant that has like 10 or 15 employees, they go out, they hire an employee or multiple employees, they get the place set up, they get up desks, they do, they hook up with the internet, they do all of that, right? So that way they can lease out desks or offices to individuals or a couple different people or smaller companies that need uh a smaller space, it's affordable for them, flexible lease terms, the rate you get a higher price per square foot since you're renting out desks and everything. It's kind of similar to almost like an Airbnb or a room share type of service where you're renting out your house by the room, right? As opposed to renting it out total, you get a little bit more money. And these guys are everywhere, they have a huge presence in I know Dallas, Texas, they have like 30 or something like that. I know in here in Phoenix they sent me the list, they've got like 13 or something like that in our area. And we actually, when we first started, my former business partner uh started, we actually leased out a spot from Regis, and I think they do a great job. So when they were interested, I was I was pretty stoked. And then the my broker had a meeting with their broker, and they talked about it the whole presentation, and I got numbers and everything like that. It definitely got less exciting after I heard about it because there are some downsides to it for sure. Now, the upsides are fantastic, but there is a major downside to it as well. So let's just start with the poop. They do not sign a lease, it is a partnership program, and what they do is they take care of all of the management and everything. We don't have to do anything, but we have to pay for it. So in this case, they are estimating uh, well, at first they estimated$86,000 worth of TI tenant improvement. And at first I was like, what the f are they wanting$86,000 for? I spent about$90,000, maybe maybe$86,000 on the remodel itself. So I'm thinking, what are they gonna do? Paint, redo the flooring, whatever. And then I realized that I was like, oh shoot, you know what? They're probably going to need they're talking desks, internet, printers, power cables, refrigerators, all of that type of stuff to get this facility up to a proper working co-space. And like I mentioned, this company's legit, they do a fantastic job. Really, really, really, really impressive stuff. So that number made a little bit more sense. So we have to then come up with about, you know, they came up with 86 grand. The guy's like, hey, it could probably be closer to 76,000. And then after we were a little bit interested in the whole deal, the guy went out to the facility and liked it a lot more than they initially did. So now they're gonna tweak their numbers down. I relayed to my broker what our concerns were with their offer, so they're gonna tweak it and we'll see. Maybe we can get something going. I don't know. But for starters, have to come out of pocket at least$76,000. I shouldn't say at least.$76,000 is the most that we'd have to come out of pocket for tenant improvement. And then they gotta go get this place leased up, right? And it's not like they just turn it on and they fill the place up. It takes a while. So they're they're planning on about a year-ish to get it to get it going, which means the first year they're expecting total revenue to be fifty-six thousand dollars, is what they had. Our other spots rented at$2,000 a month, so$24,000 a year plus fifty-six thousand dollars. That's eighty thousand dollars of revenue that we will bring in, of gross rents that we will bring in. Now, this building costs us somewhere about a hundred and twenty thousand dollars a year if we have to pay for all of the utilities and everything like that. Uh either HOA is a thousand bucks alone. So uh do the math real quick. That means year one, we would lose forty to fifty thousand dollars depending on what what's going on. So the big downside is coming out of pocket, seventy-six thousand dollars right off the clip, and then having to eat forty to fifty thousand dollar losses over that first year. What does that end up being? Now that's a tough pill to swallow, especially because we're already had to buy the building six hundred and eighteen thousand dollars, had to remodel it, you know, and then now we're paying interest and everything like that on it already, two hundred and forty-five dollars a day. To all my listeners that have been listening for a while, they know that number because I've mentioned it quite a bit. But either way, and so coming out of pocket, not making money, and then my big concern is the counterparty risk, right? Of having Regis come in here and then it underperforms, right? Like, that sucks. Imagine forking out 150 G's and then just getting your ball stomped on and not making any money, which would just absolutely be the worst, right? Because then you're out of the initial money and then you're out of the money that you were expecting to make for rent. Now, those are the negatives. The upside is pretty tempting, though. Since they are doing a co-working space, I mentioned in the beginning that the price per square foot is considerably higher than if we were to lease it to a whole tenant. To give you an idea, right now we're listed at like 22 bucks a square foot. And based on the numbers that here, let me pull up these exact numbers here. When I mean exact, I mean exactly what they are projecting. So um, to give you an idea, let's do some quick math. 20 bucks a square foot. No, so 22 bucks a square foot times 7781. We're looking to bring in, yeah. I mean, that's a little bit high. Let's call it 20 bucks a square foot just in case. We were looking to bring in about$155,000 total. I mean, total, total with our other$10 and two. So I'm gonna remove that because that kind of convolutes it. Let's let's bring that back down$24,000. So we were planning on bringing in from that vacant side$131,620. Now they are projecting that year two to be bringing in$305,000 year three, 372, and then in year four, they would be expecting four hundred and sixteen thousand dollars.

unknown 11:04

Woo!

SPEAKER_00 11:05

Now that is why I am entertaining these deals because those numbers sound fantastic. Also, I believe I forgot to mention that Regis's cut. They just take 16% off of that number, and again, they take care of everything. They hire the people, uh, they do the build-out, they operate like the snacks that they sell, they operate the virtual offices, they operate the convent room, all of that. We would still be responsible for the maintenance of it. Light bulbs go out, something breaks, water leaks, whatever. They do the uh they do take care of the janitorial on their end too, which I thought was pretty neat because that's not cheap neither, which which does help out. So those are the downsides. The upsides are those numbers, and then like the price per square foot that they're getting, they're getting like$50 to$60 per square foot, which is just nuts, which is awesome. So you're getting four times, three times the rent, and then you're splitting the you know, you're obviously lopping off that 16% fee off the top, which definitely adds up. But with the numbers that they're projecting, I don't want to say it doesn't matter, but it definitely makes it a lot more easier to swallow. Now, I'm a dummy and I got this illustrative commercial overview, and it's like pretty hard to decipher. I had to do like a 40-minute call with my broker and go over line by line, and he's never seen anything like it neither, so we were both just kind of like going through it together and figuring it out, and I got a pretty good idea of uh what it looks like, and man, the upside, golly, that that kind of gets me excited. But to go through a year and a half, a year at least, of losing money while they get this place rented up, that that I you know, I just don't know how that works because Big Daddy over here doesn't have 150 G's just to put into this building right now. If we were to do this deal, the only way, only, only, only way this shakes out is if we bring on another partner that wants to bring in that money, and then we have to do an equity split. Right now, it's just 50-50. Me and my partner with no outside investors uh that are equity. We do have debt. We have a primary hard money loan on it, and then a secondary loan on it as well that we use for the rehab. So we have debt partners, no equity. I love having equity because that's why I'm in this game. I am doing this to produce wealth, right? Down the line in the future, delay that gratification and build wealth slowly over time. So equity is really, really important to me. However, I am not afraid to give up equity to get the deal because the way this is shaking out, this could be a fantastic, fantastic deal. They uh Regis particularly is very, very, very interested in making their presence bigger on the west side, which is where this property is. The building is set up like perfectly for how they like to operate their offices and maximize their space. It's got a gorgeous entrance, a big winding staircase, and tons and tons of individual offices. So that way they can chop them up. And guys, they're putting multiple people in offices as well. It's not like everyone gets their own office, and that's how they're really able to drive that price per square foot numbers. They did send over some great information on other buildings in the area, on when they opened, what their uh what their cap or their vacancy rate was. Like to give you an example here, they took over one on January 1st of 2024, so like two years ago. They opened it, they started it, and they were at 21% capacity. Uh, last month or this month here, they were at 78%. So two years later, all the way up to 78%. Now you might be, oh wow, 78% doesn't sound that great. It seems like a lot of these are in that 70 to 80 percent category. Some are at 100, 91%, 92%, 91%, 100%, 93%, 71%, 78%. So uh these offices don't need to be 100% to make money. In fact, one of their flagship properties on the west side, definitely not their flagship property overall, but on the west side specifically, let's see here, it is called the uh Peoria Center uh at Arrowhead. And these numbers are just out of control. Out of control. They're getting$80 a square foot, and this building is quite a bit bigger. It's about double our size, and I don't know how this is set up. I'm assuming this is I do I want to go by there and take a look. I'm assuming it's like your big traditional wide open, just standard like vanilla box office where they have just cubicles because they have 68 offices and 161 desks. To give you an idea, our place is half the square footage, but we only have 15 offices, and they have 68. So I'm just thinking, holy cow, how do they cram all these people and all these offices in there? So I want to go by, take a look, and and and see how uh they're set up. But$80 a square foot is just absolutely insane to me, and the upside is just tremendous. And the other thing that one of my friends shout out Dane uh for bringing this up too. He's like, I wonder how that valuation works. Do you still value it at the same uh off of the NOI, and then you just take off those expenses that are that's getting paid to Regis? I think so, right? Because at the end of the day, if the building's making X amount of money, it's making X amount of money, right? Like, who cares what Regis's cut is at that point? If it's producing tons of profit, that building is just gonna be worth more money. So uh another thing is they want to do a 10-year lease or a 10-year agreement, I should say. I shouldn't say lease because it's not a lease, a 10-year agreement, and basically a partnership agreement. So uh that's a little that's cool, right? Oh, guys, and then also another major downside is that we would have to pay our broker for that as well. Uh, you know, the expectation is uh, I believe two and a half million dollars over ten years or something like that. Uh it's let me go back to those numbers, but either way, the uh the commission on that is is gonna be like 90 grand. So my broker's really cool. Shout out Preston. But he's like, hey, I don't need the money today. Obviously, we could work something out, and they mentioned that in the very, very beginning, too, where it's pretty common to pay the uh like the less ores or the less ease broker, and then the less or's broker gets paid over time, maybe an annual payment here, or maybe a monthly payment. I don't know, that all depends. But that's commonplace too, and considering that this is not a guaranteed lease, it's uh kind of a shot at what you can get, projections and everything. It makes it difficult to work out what exactly the commissions would be, but uh, I mean, not a moot point, but for this, it who knows, but either way, again, that's more money that we would need to shell out. So that hundred and twenty hundred and forty thousand dollars, hundred and fifty thousand dollars, that's probably closer to a hundred and eighty grand plus because uh over time we're gonna need to pay that that broker too. So that's probably two hundred thousand dollars now that I'm now that I'm thinking about it, which is another reason why I love this podcast because it just gets me going and starting thinking about things that I never thought about before. So that's basically the dilemma here. Now, I told the broker that I am interested. He viewed the place and they're redoing the numbers. So I'm curious to see at how much they're willing to work on it or what they're gonna shave off and or add potentially, and then once I see those, I'll see if it's even close, if it's remotely something that we're interested in, and if so, maybe they're willing to negotiate on certain things. My big concern, guys, is that we're spending a ton of money and trusting these guys, we're handing over the keys to the Ferrari to these people, and uh that just makes me a little bit nervous. I feel like most entrepreneurs like that control, leaving uh having or losing that control is uh I'm not uh completely opposed to it. It's just foreign because just in the past, every time you give control up over something, I feel like it I want to say never, it's it's easier to get screwed that way when you're not the one moving the needle, pushing, and doing everything. So I know that's a me problem. I know that's a me problem, and something that I do need to work on. So do I want to go out and take a$200,000 bet on somebody else right now, especially a big corporation where they have their lawyer budget is more than our buildings are worth, right? So it's like at the end of the day, they could just back out and say, Oh, screw it, see ya, it didn't work out, right? And they're like really not liable outside of whatever they had to put into the deal, uh, as far as like time, effort, and everything like that. So that's a major concern, too. But I guess some more due diligence is definitely needed. I want to go check out that facility in Arrowhead and see exactly how that is laid out and walk it and just get a vibe for that for that facility, and then hopefully these guys come back with a little bit of uh some better terms and see if we can get it to shake out because A, if Big Daddy over here doesn't need to manage this property, Regis takes care of it all. We're getting checks for 30 40 grand a month, you know, 20 30 grand a month, whatever it may be. You know, that's a good way to live, especially 10 years. You know, you really don't got to worry about in 10 years, and then honestly, who knows? If it's crushing, it would be hard not to sell this one for sure, since it is a little bit of a unique asset. If it's printing money. you know the value of that building would be in the two million dollar range two and a half million dollar range no problem we bought it for six hundred and eighteen grand and you know put a hundred hundred plus grand into it so not too not too bad not too bad at all at the at the end of the day there but um that's basically that so mildly interested hopefully they come back with some good terms and I can share that on the next week's episode but I feel like I kind of touched base on uh on that whole Thunderbird deal and the whole Regis thing if nothing comes of it which is more the likely scenario at least we went through this process to see how they work maybe in the future there's another office space that would work for something you know it's always just good to get some experience under our belt get another contact in the uh in the Rolodex so uh that's a wrap for this guys I hope you enjoyed listening to this podcast if this is your first time thank you again if you liked this podcast please leave me a review five stars write me a little note if you hated this podcast and think I'm dumbass that's awesome at least still leave me a five star review and just tell me how stupid I am or if you know somebody that would get a kick out of this please send it to them that's the best way I am a schmuck I don't do any promotion uh half of my friends don't even know I have a podcast half of my family maybe more than half my family doesn't know I have a podcast so uh relying on you guys to help me out because I'm such a dummy so send it to someone say hey listen to this dude uh you might like it and then also leave him a review too if you guys want to get more updates than the weekly updates uh follow me on Instagram john.cleish joh n dot k-l-e-i-s-c h. I post pictures stories on updates when I'm actually in the field and things like that something that doesn't portray over a non-video podcast and I do video guys FYI and I know that Apple just released it to be on Apple or something like that. Haven't seen it yet but I do video so uh if you're ever online and I didn't honestly God I don't even know how to watch it I don't think I've ever seen it um so you'll have to figure that one out on your own uh now I'm starting to blab and it's getting hot in here so let's get this thing wrapped up ladies and gentlemen really appreciate you listening thank you very much and on that note until next time take your easy