Would you invest in this project (projected cash flow inside)?
I am working on my first commercial project and came up with [this cash flow analysis](https://www.dropbox.com/s/p3u2k317m8ww8u8/CT%20Commercial%20Project.xlsx?dl=0). 

The project is new construction in a small town in Connecticut. There will eventually be 12,000ish sq ft commercial space with room to expand, but the first building will be stand alone for a single tenant. I've decided to assess this tenant/building as a standalone project since if it doesn't go well I can stop building/developing.

The tenant is a small, existing cross-fit studio that wants to expand, so established with a good reputation, but not particularly outstanding credit.

Questions? Thoughts? Answers?


[{"id": "dgdj9k3", "text": "I don't know what your assumptions are on the debt service but I would probably increase your interest expense for the first year. Unless you're going to pay for the construction out of pocket your loan is probably going to be interest only until tenant begins leasing.", "replies": [{"id": "dgdkcdj", "text": "Thanks for the response. The debt service is taken from an amortization table of a 20 year mortgage we were quoted. The spread sheet shows the first full year assuming the tenant will begin leasing January 1, 2018. \n\nYou're right and I'll add that in. We'd have ~$3,000 in construction interest this year (we'd finance construction with our line of credit, which is a lower interest rate than the mortgage).", "replies": [{"id": "dgdtzb7", "text": "I might increase the interest expense a little more - but it's up to you. Assuming 3% interest rate (could be higher could be lower), $3,000 assumes $100,00 average balance which is less than half the projected build out costs.\n\nI have thoughts about tenant risk but I'm at work right now.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dgdnmi2", "text": "A 7 CAP is too tight for me, if I am doing the construction.  I would want to be around a 9 -10 for this deal.", "replies": [{"id": "dge3ufb", "text": "Agreed, there's absolutely zero room if you ever want to sell it.", "replies": [], "depth": 2}, {"id": "dgf9d1d", "text": "7 CAP for a non-credit tenant, no.  For a cooperate tenant yes, imo", "replies": [{"id": "dgfdzyt", "text": "On a $4-5m deal ... yes.  On $300k .... not worth the risk of construction IMO", "replies": [{"id": "dgfehba", "text": "ah didn't see the numbers, yea your'e right not enough skin in the game. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dgecvy7", "text": "Is the least NNN? If so - the tax, insurance, and maintenance are all billable back to the tenant. Would have a large impact if your not already accounting for these in the $50k/year rent. ", "replies": [], "depth": 1}, {"id": "dgef39c", "text": "7.23% ROI? I am in multi-family so I don't know if that's good (it's decent for MF). The cash on cash return seems kind of low to me, but again I don't know retail.\n\nHow many square feet is this? I would be concerned about the price of construction, it seems low but being in a small town maybe it's legit. What's your assumed cost of construction per square foot? What's your annual rent/sf? No architectural/engineering fees in the capitalized costs? Insurance seems low (again, small town it is probably good). What about interest during construction? Attorney fees for a commercial contract? How do the comps look? If crossfit fails, can you get someone else to rent that space? What's your exit strategy? \n\n\n\n\n\n", "replies": [], "depth": 1}, {"id": "dgei0tn", "text": "Random thoughts:\n\n- Do you want to hold CT real estate long term?  I would say its town / sublocation dependent but I view CT as politically mismanaged with taxes likely to increase, business decline, population decline, etc.  I'm not sure the macro factors are there that I would want to generally invest in. \n\n- Crossfit is going pretty strong now but what sort of cashflow do they need to generate to sustain that rent.  I don't know that I would be comfortable projecting them as the tenant for much longer than 5-10 years.  Who would be the replacement tenant for this built to fit space and at what rate? So what's your return with a year 5 exit, a year 10 exit.\n\n- How are you estimating the construction cost.  If that balloons 10-20% how do your returns look?  Are you being compensated for this construction risk?\n- I think you need to look at some scenarios where the tenant defaults, you have to pay leasing commission and tenant improvements every 5-7 years.  \n- IMO your capital reserve is too high.  \n- I'm not really sure how you are coming to that total value or cap rate. If you think your total value is ~700,000 then your cap rate is ~4%. \n- I would not invest in this myself unless there was some other benefit.  IE I also own the crossfit or I own the construction company and am making some margin / controlling risk there.", "replies": [{"id": "dghnr7q", "text": "Your first point was my first thought....Connecticut is an unknown.", "replies": [], "depth": 2}], "depth": 1}]