Pitfalls and costs of subdividing a single tenant building
Hi All

I am curious to know if anyone on this subreddit has attempted to convert a single tenant building into multi-tenant and any experiences to share, specifically:

\- is it hard to get permits and whatnot (the city and legal aspects)

\- typical costs, I found online that building out an office building is $60/sq ft, it is ridiculously high for my budget

\- timeline, is it just typical construction timeline, varying depending on your contractors?

Any insights would be appreciated! Also looking for opinions if it is even worth pursuing (headache vs payoff).

Thanks.
[{"id": "gxor29y", "text": "Permits and policies will vary by city. I  did significant DD (hired architect, took plans to city) on and office condo project. They wanted this older building 100% up to current code, including parking ratios. Sprinklers installed throughout. Additional water lines from the street. No shared utilities whatsoever. The list goes on. I don't know if every municipality will be so strict.\n\nIn contrast, I've chopped up a few warehouses into multi-tenant spaces and no one really seems to care, so long as the fire department has access and its obvious how to cut off utilities to each unit in case of emergency.\n\nTimelines and budgets obviously depend on the scope required. Less than a new build but probably more than a typical tenant build out.\n\nEdit: grammar, and to note the office bldg was in a town with a stronger building department, and warehouses were in smaller towns and stayed as light industrial, not a loft conversion etc.", "replies": [{"id": "gxovhds", "text": "thanks. I am in the Bay Area so likely super strict and that does sound more than I can handle. Figures such a project is probably not so simple otherwise these buildings would have been snapped up and divided.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gxot4qc", "text": "&gt; \\- is it hard to get permits and whatnot (the city and legal aspects) \n\nDepends on the property, city, use, etc etc\n\n&gt; \\- typical costs, I found online that building out an office building is $60/sq ft, it is ridiculously high for my budget \n\nDepends if you need to bring everything up to code, or you just need a separator wall. \n\n&amp;#x200B;\n\n&gt; \\- timeline, is it just typical construction timeline, varying depending on your contractors? \n\nHow long is a piece of string?", "replies": [{"id": "gxpoudh", "text": "I love that.\n\nMy answer to those is always \"what does a house cost?\"", "replies": [], "depth": 2}], "depth": 1}, {"id": "gxovlmm", "text": "This really depends upon your market, city, and product type. I rep a building in So Cal and smaller units lease much quicker and for a higher price/SF than larger office spaces. Ownership has broken down a number of them and permitting by the city was really quick and not too costly. 40,000 SF building is now 98% occupied with higher rents on the smaller spaces.", "replies": [{"id": "gxr58k2", "text": "&gt;I rep a building in So Cal and smaller units lease much quicker and for a higher price/SF than larger office spaces.\n\nThis.  We find that it's like people shopping for a car.  Smaller tenants have a budget not a specific cost/SF goal.  Often they don't even really think in terms of SF, more so will this space accommodate my need and is it relatively large or relatively small for what I need.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gxpoxkh", "text": "I see no one has offered that some kind of formula for electricity charges will need to be implemented now that there is only one meter (presumably) and several tenants using same.", "replies": [{"id": "gy6nsoh", "text": "We installed meters for each unit when we subdivided a 7,000 SF building into 5 spaces.\n\nSome municipalities require it, but we would have done so anyway.\n\nWe have shared electric on another property and it's difficult to split the bill between tenants.  A restaurant uses a ton of electricity, a lawyer's office not so much.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gxpyktz", "text": "Why would you want to divide? Generally a full building space gives you a competitive when leasing and can increase your exit value if they\u2019re decent credit", "replies": [{"id": "gy6ob1x", "text": "It's very difficult to find a single tenant for a large space, at least in our market.\n\nIt's much easier to find tenants for 1000-1800SF and you don't run the risk of having an entire building vacant for a year during the inevitable economic downturn down the road.\n\nWe can also get $18-$24 psf for smaller spaces in our area.  Larger buildings tend to lease for $10-$12 psf. (Modified gross lease.)", "replies": [], "depth": 2}], "depth": 1}, {"id": "gxq6d8p", "text": "I have done complicated subdivisions several times. Feel free to reply with more specific questions and I'll do my best to answer.\n\nIf you work with a reputable architect (sometimes local helps), permits should be fine. You may need to go through a relatively simple status change process (single tenant to multi tenant). This usually only happens if you're in a special tax or commerce district or in a city with an over zealous permitting/zoning department.\n\nOffice build out just depends on how much you need to do. If it's a vanilla shell, with today's prices $50s a square foot is not unreasonable if you want to pay someone to do it for you and do it right.\n\nThe usual budgetary surprises are with separating HVAC systems to accommodate a new zoning and upgrades to life safety. You're going to want to review HVAC as a space that doesn't get airflow will be tough to lease. Big life safety upgrades usually happens when permits trip anything that's \"grandfathered in\". You might have to correct that. New sprinkler systems are not cheap.", "replies": [], "depth": 1}, {"id": "gycwmtj", "text": "Apologies for the long post.  Hopefully our mistakes and our successes will help in your plans.\n\nMy brother and I are in Florida. We subdivided two buildings, each into 5 units.  The spaces range from 1,000SF to 1,800SF.  In our locale, renovation costs are probably close to the national average.  Certainly less than they would be in California or New York.\n\nBuilding 1.  \n\nhttps://imgur.com/a/GA5Tw3c\n\n7,000SF, approximately 115' x 60', solid brick built in 1950 with 10\" thick walls and 18' ceilings.  Lot is approximately 177' x 130'.\n\nRenovations cost $60 psf, but this was 12 years ago.  We spent another $60,000 on awnings, a corner sign, railing, landscaping and fixing the parking lot.  Including purchase, all-in cost was $150 psf.\n\nWe acted as our own contractor because we paid as we went.  It took us two years.  A contractor isn't going to want to stop and start a job for two years.  If you owner-contract, the property must be in an individual's name, not an LLC or corporation.  We did some of the grunt work ourselves, like removing stucco from the interior brick walls and painting.\n\nWe didn't have to re-roof at the time, but did so recently, installing an elastomeric surface at a cost of $80,000.\n\nWe had an engineer assess whether the walls could withstand cut-outs for four new entry doors and windows.  He drew up the plans and included the dividing walls and new electric and plumbing in his drawings.  We then got his plans approved by the building department.\n\nBecause it was a major renovation, we had to submit parking and landscaping plans.  I read up online and drew these myself.  A pro probably could have done it in a few hours.  It took me days but was approved.  Fortunately the lot is less than an acre so we didn't have to worry about storm-water mitigation, which may have meant installing a retention pond.\n \nMetal framing and drywall for new dividing walls.\n\nInstalled new electric with separate meters for each unit.  We installed electrical and CAT5 outlets every 8 feet along the new walls.\n\nInstalled five new 2 to 3-ton HVAC units with industrial style ducting.\n\nInstalled 8-inch spray foam ceiling insulation.  \n\nInstalled metal ceiling tiles.  Normally $18 per 24x24 tile, I picked them up for $5 each on EBay from a contractor who had leftovers from a large commercial job.\n\nWe were getting quotes of $50,000 for 110 feet of commercial grade railing.  I found 240 feet for $2,000 on Craigslist and had them installed for $4,000.  A large condo had replaced all of its railings and it was excess.\n\nThe floor was concrete with asbestos tiles, so we had to have them removed professionally.  We painted the concrete.  Polished concrete would have cost $5-$8 psf.\n\nWe put in small loft areas with a shower and toilet, kitchenette and room for a bed, thinking some tenants would like to have a live/work space.  In 12 years, the only tenant who lived in the loft was a guy whose wife kicked him out.\n\nTwo ADA compliant bathrooms for each unit, one downstairs, one in the loft.  Had to cut out the concrete floors for plumbing.\n\nWe scoured EBay, Craigslist and the Habitat ReStore for materials. We got free double entry doors from a building that was being demolished.  We saved over $75,000 by doing so, which partially made up for the money we wasted on the lofts.  \n\nBuilding 2.\n\nhttps://imgur.com/a/6r73PZa\n\n6,000SF, CBS (concrete block with stucco) built in 1951, approximately 110' x 55'.\n\nWe used a contractor and an architect for this building, and renovations for subdividing into five \"vanilla shell\" units cost $130 psf. All-in cost was $190 psf.\n\nUnlike the first building, the walls  were unable to withstand the cut-outs for four new entries and windows so we had to replace two walls.  This necessitated replacing the roof.\n\nIn the future we may want a rooftop deck and a restaurant, so we reinforced the roof, put in an underground grease trap and constructed it in such a way that we could add an elevator as needed.  Had we not done this and not needed to replace two walls and the roof, our renovations probably would have been about $100 psf.\n\n8 months for renovations.\n\nCorner location downtown, so no parking lot.\n\nFive 2 to 3-ton HVAC units with industrial style ducting.\n\nOne ADA bathroom and one kitchenette area for each unit.\n\nNew electric with individual metering.  Electrical and CAT5 outlets every 8 feet.\n\nOpen ceiling with exposed rafters.\n\nHurricane-rated fiberglass entry doors and windows.\n\nPolished concrete floors.\n\nFor the vanilla shell spaces, we generally had the tenants pay for any build-out costs and gave them free or reduced rent for several months.  We would cover about 50% of the cost.  Some used an open concept and the cost was minimal.  Others spent up to $60 psf for more elaborate and high-end build-outs.\n\nBefore you invest  in renovating a building, make sure the rental income will give you a good return.  In our market, a city of about 50,000, nicely renovated spaces in good areas go for $15-$24 psf (modified gross where we pay taxes and insurance, they pay CAM).  With a modified gross lease of $18 psf, we need to be all-in at about $175 psf for a CAP rate of 8%.  We aim for a 10% CAP rate whenever possible.\n\nBy subdividing, we don't run the risk of having the entire building vacant for months and it's much easier finding tenants for smaller spaces.  We also get more psf than we would for a large space.\n\nWe don't like debt (many on this forum would strongly disagree with our philosophy).  But you should definitely avoid being overleveraged. You'll be glad when the inevitable downturn occurs and your vacancy rate goes up to 10%.  Or when there's a pandemic and you have to give partial forbearance to a third of your tenants.  .\n\nWe plowed our excess cash flow back in so we could pay off our 5-year balloons and lived off of our \"real jobs\".  We then saved up to buy our next building.  We have six properties with 30 tenants, but it's taken us 15 years.  Again, many in this forum would be far more aggressive and carry debt.  I don't think that's unreasonable but too much debt is risky.  And for some reason it just feels great to have no debt.\n\nIf you're just getting started, get a smaller building that can be divided into two or three spaces.  Look for neglected buildings on corners with high traffic counts.", "replies": [{"id": "gyehfs1", "text": "thank you for not making snarky comments like some others. i was looking for exactly this, anecdotal experiences on such an undertaking. I definitely have a better understanding that it is VERY involved and costly, and from your experience, extremely time consuming. \n\nPrior to this post I was hoping to hear that it is easy and quick (&lt; 3 months), because just as you are thinking, single tenant is sooo risky; 1 vacancy and you are losing money. There are quite a bit of single tenant buildings and I thought maybe I could change that. \n\nagain really appreciate your post.", "replies": [{"id": "gzgxnhd", "text": "Make sure to get permits and work on meeting zoning code requirements for the renovations. I worked on financing a couple deals that fell apart once the appraiser pointed out that there were no permits for the improvements so the borrower would either need to get the improvements approved by the city or rip out all the improvements and still get it inspected by the city! There are bridge loans available that will help fund the renovations for subdividing spaces. It sounds like it could make sense if you can double the rent!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]