Looking for Insight on Our Next Move Regarding Our Mixed Use Building
In the Spring of 2019 we gained occupancy permits on our mixed use building in NW Indiana. The property consists of:

-Two, street level retail spaces (currently both doctors’ offices) of around 2500sqft each

-20 “WeWork” type small offices of approximately 2-300sqft each, plus conference room and bathrooms—this makes up the second story

-1 2800sqft apartment and 2 1400sqft apartments make up the third story

All in, the property cost us about 2.5million to build and is now appraising for approximately 3mill. Between appraisal and amortization we have about 800k in equity.

For some additional info, we currently live in the large apartment upstairs, own and operate one of the doctor’s offices, and own a small 5% stake in the other which allowed us to purchase this property under a 504 loan by meeting the 50% threshold for owner occupancy.

My primary question is, where do we go next? We’re not necessarily looking to do anything today, but as we continue to build equity, we understand the potential we have to use that money as a down payment elsewhere. This is our first multimillion dollar deal and are looking for any advice on tax mitigation strategies (already have a great CPA/attorney, but always looking for other options), potential pitfalls, and most importantly what sort of property we should be considering for our next purchase (ie size/value). Any insight this group could provide would be much appreciated!

Edit: This property was build to last, no low-end anything construction or buildout/finishing-wise. We are also no set on our next investment being in the exact same area open to out of state purchases/other areas in Indiana/etc

Edit 2: I am 29 and wife is 27, we have a long time horizon for rolling equity, adding to portfolio, getting in to larger deals, etc
[{"id": "hkzja7q", "text": "Where in NW Indiana? Big difference between like Gary (or even south side of Gary towards the county) and Hammond\u2026", "replies": [{"id": "hkzkciz", "text": "Don\u2019t want to get too specific just for anonymity, but think more Crown Point, Valparaiso, Chesterton, Munster, type places! \n\nEdited to note that we don\u2019t need next property to necessarily be in the exact same area", "replies": [{"id": "hkzo6ho", "text": "Would be interested to hear how the wework spaces do - that\u2019s a lot of suites to lease, I\u2019d imagine once you get someone they\u2019re sticky but think they\u2019ll be tough to absorb. Good luck with it!\n\nAs it pertains to next investment would look at buying class b apartments close to you - easy to manage stuff that you\u2019re close to and rent pressure is real in suburban apartments. Would also think you can buy stuff at a pretty reasonable basis per unit in your area. Would try and buy on the Indiana side not the Illinois side and if you\u2019re in it for the long haul would try and pull out fixed rate FNMA / FREMF debt - super cheap to get 10 year fixed right now (but appreciate that if you take out 10 year fixed you can\u2019t sell it without paying a big prepayment penalty they make you defease the debt which could be crushing\u2026 unless rates spike and then you might make money on defeasance)", "replies": [{"id": "hl0iwzk", "text": "Thanks for that thought, though we are open to out of state investments, I totally agree with avoiding Illinois just due to their taxes. A dollar just goes so much further in IN.\n\nAny thought or experience in taking that equity and using it to get into a larger national deal (think Grant Cardone $80, 90, 140mill deals). My only concern in that type of scenario would be equity liquidity in a deal like that and can I get out when I need that for another investment.", "replies": [{"id": "hl12hdr", "text": "I wouldn\u2019t give money to grant cardone he\u2019s buying stupid shit right now and from people I know that have done business with him he has no idea what he\u2019s doing (ie signing huge recourse guarantees, not redlining PSAs or LAs\u2026 great guy to sell to, bad guy to invest with) You also don\u2019t want to lose control in an investment - syndicators will rip your face off. If you want to put money into an institutional fund for exposure roll it into BREIT / SREIT / KREIT and let one of the mega funds manage your RE exposure - they will suck out fees but at least they know what they\u2019re doing.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkzlgas", "text": "Digital real estate - Next investment look into a property type that can support the new digital infrastructure ( data centers, ecommerce fulfillment, crypto, edge, telecom, wireless, smart city) also look at properties in areas with multiple fiber providers running throughout. And if projects are $1.5m plus consider private revenue bonds for financing- could get yiu property tax exemption and 2-3% less interest", "replies": [{"id": "hkzna51", "text": "Those are much much more expensive than $3MM. Not to mention utility costs are exorbitant and colocators want a strong brand", "replies": [{"id": "hkzo5x1", "text": "There\u2019s a business model in telecom called powered shell, investors provide the property, power, and fiber and lease to colo / DC tenants. Pretty common and low capex for landlord. Also, edge data centers are typically smaller operations closer to the users, I work with properties in NYC to convert office space into these. They are used for IOT, autonomous driving etc that need to process faster and closer. \n\nAlso, looking at warehouse industrial with abundant fiber is not costly for the landlord and with the amount of companies using automation, AI and robotics, (fullfillment, manufacturing) properties will need multiple fiber providers for network redundancy and properties will need fast connectivity to power AI and iOT networks.", "replies": [{"id": "hkzohxe", "text": "In my market (Chicago) even the powered shell buildings are still 200K+ SF precast warehouses with 30\u2019 CCH, etc. even as a regular distribution center you couldn\u2019t get one for 3MM", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkzn3sm", "text": "How well are the wework style units renting? I know in my market converting that space to more traditional style units would likely increase the value.", "replies": [{"id": "hkzncrd", "text": "Fully-leased since about month 6 actually! Though e have talked about conversion to either more apartments or traditional offices should that lease rate drop off.", "replies": [{"id": "hkzo4yt", "text": "Oh wow, congrats!", "replies": [{"id": "hkzobt6", "text": "Thanks so much!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hl04qvu", "text": "I'd be very interested to know how this deal works out down the road, especially the WeWork right next to what I assume is long term residential. \n\nMy own area (Maui,HI) is making zoning changes to enable more density and more mixed use in certain neighborhoods, but it is too early to evaluate the actual results. The residential tenants and the commercial tenants seem to have some friction, especially over parking, security and the increased liability that comes when you add children, elderly, pets, etc.  to the mix. \n\nAlso in my community the enforcement standards and certificates of occupancy (CO) are still in transition, so I am seeing a lot of underused office space being converted to residential tenants without the benefits of even minimal health and safety precautions/compliances - by that I mean exits, fire extinguishers/sprinklers, kitchen/bathroom facilities and so forth. So far during the pandemic - where housing is so tight and rentals so hard to come by - the city fathers seem to be looking the other way, but that can't last forever.\n\nTell us what the zoning looks like in your area that allows the kind of mix you describe and also please comment on the parking. Is it designated or in common? I'd really like to hear more about your project. \n\nJust one other question, 504 is a program to assist small business owners in acquiring commercial property for their own use (owner occupants). My understanding is that you, the owner, are required to occupy at least 50% of the space. That is usually interpreted to mean your own primary business has to utilize the premises, not space you lease to others. Do you expect problems with compliance?  What does your lender say about your planned uses?", "replies": [{"id": "hl0hbpa", "text": "Hey thanks for your super thoughtful reply. Forgive me if I miss any of your points through my response and I\u2019m happy to touch base again.\n\nStarting from the bottom, you\u2019re correct regarding the 504. If I wasn\u2019t clear in my original post, my wife and I are the owner operators of one of the doctor\u2019s offices on the main floor and have negotiated a 5% ownership of the other retail space which has allowed us to claim the entirety of the first floor as owner-occupied. All common spaces on every floor are also technically ours and therefore \u201cowner-occupied\u201d in addition to our almost 3000sqft apartment on the third floor we occupy around 60-something % of the building and have no issue with that aspect.\n\nAs far as concerns with the mixed-use status, it was actual at the request of the city council that we build the property and lease it as such. Our city has a number of convoluted zoning designations, but our particular lot was zoned specifically as \u201cRetail-Residential Mixed-Use.\u201d The location of the project is bridging the gap between our downtown and a more residential area, but there is also a medium sized commuter university campus nearby and they found our particular use case intriguing as they\u2019d already turned down the typical Dunkin drive through or gas station use requests from other potential buyers of the lot itself.\n\nRegarding safety measures and compliance etc. not that we would every put others in danger anyway, we also have huge personal stake in safety measures for this building as we are business owners downstairs and tenants upstairs. During the planning process we made other considerations including just residential on the second floor as well and so every measure regarding exits, windows, fire escapes, alarms, and sprinklers have been taken. We also built the structure itself with ICF which is naturally fire safe given its makeup. The building was also placed on an old gas station location, so we even put in top of the line fume mitigation systems to vent any potentially harmful chemicals in the soil up to the roof.\n\nFortunately or unfortunately the city was actually very strict in relation to how the parking should be handled, we do have open parking, but permitted during overnights and monitored during the day, meaning our few residential tenants should always be given priority essentially, but with enough private parking in the lot behind the building that we actually qualified to make the other retail space into a restaurant\u2014though we decided another healthcare provider was likely to be a bigger boon to our own success.\n\nThanks again for your input and let me know anything else I can answer!", "replies": [{"id": "hl1et9e", "text": "Good answers, thank you. I made a note of your name r/hoosier_doctor and I clicked follow. I'll be interested to see how it works out for you. This isn't by any chance near Notre Dame U?  The last time I was on the Mainland a couple years back I visited that area and thought it had great potential. Was really impressed with some of the programs at the university. As a former part time Hoosier myself (attended IU in Bloomington for a while, lived outside Indianapolis near Ft. Benj. Harrison Defense Info School ) I'm always interested in what's going on in Indiana.", "replies": [{"id": "hl2756y", "text": "I\u2019m a little farther west than ND, but I tend to agree, the area up here is full of potential. Considering the schools in the northern half of the state: ND, Purdue, Valparaiso, as well as satellite Purdue and IU campuses I love the renting potential in those locales.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hl06kid", "text": "Why do you feel the need to \"do\" anything? If the income is good, then sit back and collect the rent. Passively look at potential deals and if there's one that catches your eye, then jump on it.", "replies": [{"id": "hl0hx5u", "text": "I think the second part of your answer gets more to the heart of my question. I guess it would have been better phrased as \u201cWhat would YOU consider doing\u201d if you had 800k in usable equity (or 1-1.5 mill in the fairly near future) and didn\u2019t want to just cash that current cash flow every month. I\u2019ll go back and edit the post with ages in case that changes your mind at all, but my wife and I are young\u201429 and 27\u2013and understand the potential of rolling our equity in larger and larger projects for the next 30-40 years and creating a potentially massive (size and/or value) portfolio.\n\nThanks for the reply!", "replies": [{"id": "hl1a8j2", "text": "You don't have nearly that much usable equity.  If you did 90% of $2.5m (50% first and 40% 2nd after the debenture) you have $2.25m (so based on your $800k figure this was very recent) on a $3mm property (we'll come back to the appraisal) which is right at 75%. Your 5% ownership in another business might help the CDC lender get you approved as 51%+ occupancy but someone coming behind to cash you out is unlikely to agree with that line of reasoning since you can't control that entity's cash flow to support *your* RE loan. Nor can you access any typical consumer lending products on your primary residence since it's a residential unit tied up in this deal.\n\nWas this appraisal completed before construction or after stabilization? As completed appraisals are only as good as the assumptions that went into them.  Flip to the income approach section and compare it to your current rent roll/ P&amp;L to see how close it is.  I've seen properties lose hundreds of thousands of dollars in appraised value because the pre-construction appraisal assumed triple net leases and what was actually signed was something less.\n\nYou have a complete mishmash of property types (retail/medical, small office, and residential) which is going to complicate your LTV limits on a cash out since what is loved (the medical) is also combined with the unloved (short term office) and 50% of the residential is also your primary residence. You also might be messing up the ability to 1031 the property by living in it; consult an expert.\n\nIn short, pump the brakes. You did great getting into this property with less down and better terms than you would normally get but let it season a bit. You don't have nearly the \"usable equity\" you think and getting access to what equity you have right now is probably going to have a worse terms &amp; conditions than your current loan.", "replies": [{"id": "hl2d5ln", "text": "To add to this comment, there are lots of lenders that stay far away from owners living at the property.  Living at the property entitles you to foreclosure protections similar to home owners that lenders want to avoid with investment properties at all costs.\nYou also didn't discuss debt service coverage ratio of your current mortgage using market rent for the building. A lender will want to make sure this buildings tenants can service the debt. And that DSCR ratio may constrain the loan to less than 75% LTV.\nUltimately long term I like your value add strategy of buying distressed properties, fixing them up and leasing them out. You just need to keep a close eye on DSCR and reserve savings so you don't end up in debt up to your eyeballs.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]