New Property: Mission

How aptly named is this? Last month I was networking at a general business networking meeting I hadn’t been for a couple of months. I took off from doing all my networking with my head down working way to hard at my 9-to-5.

It was an interesting meeting and the organizer was trying to take it in a new direction but the lack of attendee’s made it apparent that it wasn’t working. As I mentioned here it was a meeting where we sat around and evaluated the different barriers to revenue that a project had and I tried to bring the group into thinking about outside the box method to increase the income from the Modesto Commercial Property.

One of the attendee’s mentioned some ideas about the property.  He turned the conversation to a property that he owns with partners on Mission. He went on to about how he was ready to break up the partnership and start making money on this property.

History of Mission

Mission has been around for so long that it is part of the Historical Overlay Zoning. Which means changes and upgrades are going to cost extra, because, you have to keep the look and utility of the building the same. The property has been around long enough that Charlie Chaplin stayed at the property when it was a Hotel while filming his movies in Niles.

Ten years ago the partners purchased the property with the intent to make it into a bed and breakfast. I’m not sure how the plan backfired or what went wrong but it is not now operating as a Bed and Breakfast. It is operating as an extended stay motel, bordering on being a boarding house. Currently the other half of the partnership (the ones I haven’t met) live and work on the property. My contact is frustrated by the fact that by living on the property they are consuming revenue producing apartments, and that on top of housing they are also paying themselves a salary and housing their grown children in another one of the apartments. Leaving a very small income stream for the guy who financed the property.

When you invest with family, friends or as in this case, Friends of the Family, you need to make sure that you have a very clear operating agreement with exit clauses that everyone understands going into the project with. Mission Project is complicated by the fact that there is no clear operating agreement. This is fundamental to being successful in any kind of partnership. Now, the partner that I have met has developed a bad taste in his mouth because the partners can’t afford to buy him out, and they refuse to sell because he is financing their lifestyle.

Mission Layout

Sitting on a picturesque 21 Acres in Fremont, less than an hour from San Francisco, the main building is an old Victorian style home. With a couple of cottages scattered around and a full SFH on the property also. All in there are 12 Rooms in the Victorian, and three  1-room cottages, a 4 room cottage, and a 3 room cottage. According to the caretaker that I talked to the basic efficiency rooms are rentMission Gardening for $675, and the rooms with a kitchenette are running upwards of $1600.

The property has a onsite coin-op laundry, beautifully appointed gardens that have been used for weddings, a large shared kitchen for the efficiency rooms, and a large dining room and foyer that can be, and is, rented out for business meetings. A picturesque garden that has a view of the valley. A rolling hill the stretches for an astounding 21 acres all off the beaten path. But 5 minutes by car to the Bart Station!

Highest and Best Use

Commercial property owners need to understand the highest and best use of their properties and move the property in that direction to maximize the utility and revenue of the property. The website and some articles around the web show that when the property was first purchased it was the intent to run it as a Bed and Breakfast. Which I believe is also its Highest and Best Use. A weekend resort retreat less than an hour away from San Francisco and Oakland. A perfect place to hold a wedding, host a weekend hack-a-thon, or corporate officers retreat. During the traveling months it a perfect place to stay near San Francisco without having to be in San Francisco!

The site is perfect for a wedding venue. Idyllic gardens give a great backdrop to the perfect views of the valley. Having the rooms makes it perfect for a destination wedding where the wedding party can holdup for the weekend. The on-site kitchen is perfect for family dinners the night before, and for a caterer to use the day of. With a proper dinner time chef and a decent breakfast bar system, the bed and breakfast would be incredibly profitable. However, running as a Bed and Breakfast is an incredibly labor intensive process. Not exactly a passive investment. By having on site innkeepers you take a step towards passivity. However, there needs to be a high amount of trust and accountability. This is where Mission is failing now.

I wonder if the next step down on this property would be to have it be a Hostel? With the right European tweaks the property could become the defacto place for Europeans to stay at when they head over to visit San Francisco. As a hostel you eliminate the need to staff the kitchen and your management becomes as you sub-contract out a lot of the extra work. Housekeeping and landscaping duties.

The extended stay model is also working. It’s there, but it’s not being maximized. By not keeping the properties up to the right level (massive amounts of deferred maintenance) the amount that the operator are able to charge has come down relative to the housing affordability index of the area. $1650/mo for a fully furnished: 1/1 apartment with 2x weekly housekeeping is cheap! Extended Stay a mile away is $150/night or $4,800/mo. And that is for a studio with a kitchenette, not a 1/1 apartment.

The next level would be some sort of boarding house, shared use facility. A group home or leased out as some sort of care facility. I doubt however at the estimated purchase price that the right non-profit operation could be found that could make it a cash-flow play. It could make a great tax deferment/capital preservation play deal that way. Unfortunately, that’s not where I’m headed.

Zoning

I went to talk to the planning department of the city to find out what the property could be! Apparently because the property is so large it falls within three separate zoning ordinances. The two or three acres next to the road is zoned: Residential and can be subdivided in 6000sqft parcels. Which means theoretically, the front could be torn down and subdivided into 21 parcels. With the median 3/2 home price in Fremont at $700k, this would be a huge play. That’s a pretty big number on the back-end. and it still leave 18 acres available!

When I see numbers like that I am always surprised why everything isn’t always torn down and rebuilt! But as anyone who watches the industry we know that building tends to be highly speculative and can be catastrophic, but a direction a lot of people try to get into! With an almost $15MM price tag for subdividing, and developing 21 houses, you bet I’d be in development if I had been in RE for long enough to feel comfortable with it.

The back 18 acres are zoned open space. When I asked at the planning department the clerk didn’t know off the top of her head and it wasn’t on the hand dandy handout that she had on her desk. So we had to look into it a little with a couple clicks of her mouse, we discovered that it was exactly what I thought it was, open to Agricultural development. It amazes me that this profit spigot is turned off on this project currently. 18 acres just sitting there doing nothing! Why not lease it for grazing? The farms are already there. With a long term lease you could increase the profit of the property right away. I will suggest to the partner that I am talking to that he work the system a bit so that he leases out the back 18 to an agriculture company and collects the profits without splitting them with the innkeepers.

Summit Pivots

Thanks to my attendance at the San Francisco Summit I’ve found some pivot points to make on this property.  Talking to Brian Burke after the summit the idea of transitioning this property into a development play was off-putting to me.  Too much work, and definitely not enough knowledge.  During the 30 minute phone call Brian was able to evaluate the property using the internet, and tell me some pretty telling things.  He made it sound like there is definitely some potential to a development play.  However, I’m finding the timeline and the risk above my threshold.

Corporate Housing! The last session of the day at the summit there was a discussion about Vacation Rentals and short-term housing.  As I mentioned above, the highest and best use is probably the Bed and Breakfast, what’s the best next thing?  Corporate Housing!  The expert was saying the rents could double to triple.  $650×2 = $1300, $1600×2 = $3,200.  It moves the barometer from $250k GSI, to $500k or even as high as $750k!

With Thanksgiving, I didn’t meetup with the Corporate Housing expert, but now she is on my schedule to check this out a little more.

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