50 McIntosh Drive, Markham. Syndicated 1995.

Properties For Sale & Lease.

50 McIntosh Drive, Markham. 60,524 leasable sq. ft. Offered for sale at $3,250,000.

THE PROBLEM

In March 1995, Peter LeGrice syndicated the purchase of this office building. The Building had been offered for sale by the receiver under power of sale, for some months and was soon to be forty percent vacant. At the time, it's net income was $473,000. or (473,000 / 60,524 =) $7.82 per sq. ft.

1. The tenants were fed up with the poorly managed building and wanted to leave!
2. The building needed some major repairs as the roof leaked and the heating and cooling equipment needed overhauling.
3. Many cosmetic repairs were necessary to the interior and exterior.
4. Many of the existing tenants had leases expiring within the next few months.
5. Forty percent of the building was soon to be vacant if something wasn't done!

THE SOLUTION

1. Peter visited the tenants, listened to their complaints and promised that repairs would be made, and that management would improve.
2. Roof and mechanical repairs commenced.
3. Peter hired a skilled workman for the summer months to begin the cosmetic repairs, and contracted the items of repair requiring specialized skills to outside firms.
4. Peter began renegotiating the existing leases by lowering rents to the current market rates! As tenants saw that repairs were being made, and management was under control; all signed new leases.
5. Peter opened a management and leasing office in the building and set up new "For Lease" signs on the property. His staff developed a direct mail marketing program aimed at office leasing agents, and office tenants in nearby buildings. Interior renovations commenced to satisfy new tenant prospects calling as a result of the marketing program.

THE RESULTS

By September 1995 the building was 100% leased. Although the rent being paid by existing tenants was lowered for the year 1995, the reduced income will be captured in future years because of rent escalation clauses that were negotiated in the new leases. By having an office on site, management problems were solved and leasing opportunities were handled properly.

Peter managed to keep the tenants from leaving and secured the cash flow. He spent $150,000 repairing the roof, mechanical equipment, on cosmetic repairs and for interior partitions required to lease the building.

By January 1996, the net income projected for the building will be $575,000. or (575,000 / 60,524 =) $9.50 per sq. ft., up $102,000 or $1.68 per sq. ft.

Using a cap rate of 9%, the value of the building in January 1996 will be about (575,000 / .09 =) $6,388,888. or (6,388,888 / 60,524 = ) $105.00 per sq. ft.

Peter's "syndicate" paid $2,600.000. for 50 McIntosh and spent $150,000 on capital improvements for a total cost of $2,750,000 or $45.44 per sq. ft. Total cash invested. (2,600,000 x 25% = $650,000 +$150,000 = ) $800,000.

By January 1995, when the new rent escalations kick in, Peter's syndicate may have doubled its' investment and they should theoretically be able to re-mortgage the building for (575,000/.09 = 6,388,888. x 75% = ) $4,791,000 or twice what they paid for it, for a cash return of $2,041,000. Not bad for an $800,000 investment!

However, Peter believes that in a short time, as the market recovers, and this period of "market readjustment" (read that: buildings offered for sale under power of sale) ends, the true value of the building will again be equal to it's land cost and building replacement cost of $150.00 per sq. ft., making it's value about $9,078,600.

The Future?

You may ask. "Can LeGrice find another syndication opportunity like this one for me? Yes we can! Building values are firming, making it harder, but opportunities still exist for speculative purchases of this nature that will make a short term profit as the "market readjustment" is still going on. The building to buy must be "under leased" yet still leasable within its' own market area when a proper marketing and management program is put into place. Before you can contemplate such a purchase, one needs someone with a good enough understanding of the market to recognize the profit possibilities before buying. An under leased building purchased in a market where the building is just not leasable, is no bargain at all. It's a disaster. Many buildings are obsolete by virtue of their location or construction and the buyer must know the difference.

The alternative of course, is to purchase a solidly tenanted building with good leases in place. The short term returns are much smaller, but the risk is a lot smaller too! Returns should be in the area of 10% on cash invested.

How to Participate.

Contact us by E-Mail and register for our E-Mail Investor News.. We will get in touch with you as ideal properties come to our attention. You will also need to know "how a syndication works", to have a better understanding of what you should be considering in the mean time.

E-Mail Legrice Real Estate. Tel 1-905-470-2288 - Fax 1-905-470-7778 - E-Mail: legrice@legrice.com

Web site administrator: Brien East, Associate Broker.