Local baker Rachel Alter has found success providing healthy treats for coffee shops and restaurants. But she wants to launch a new business featuring a shared commercial kitchen to help other small businesses get off the ground.
She’s searched for the right location for about 18 months, but financing has been challenging. By coming up with some creative ideas for funding, she feels ready to move forward on her plan. But as she’s searched for the perfect place at the perfect price, she’s discovered many commercial spaces on the market need work.
“There are a lot of candidates — the best of which for my use needs a lot of retrofitting,” Alter said. “The worst of which needs to be completely replumbed, have new electric installed, and the roof needs to be replaced.”
While the greater Gunnison residential real estate market is soaring, Alter’s experience highlights a sluggish commercial market.
Real estate agent Brian Cooper noted 12 commercial properties currently are on the market. Almost half of those listings have been for sale more than a year. One commercial property has closed so far in 2018, and two properties are under contract. Cooper said several factors may be contributing to the lack of activity.
Property taxes jump
Cooper pointed to several commercial properties for sale which have seen 20-32 percent increases in property taxes this year, mostly as a result of higher valuation. That alone, he said, can deter an investor because it decreases his return on investment.
While not every property increased — and some actually decreased — those with higher tax bills are having an even tougher time selling.
Property tax bills received this year are actually for 2017, which was a “reappraisal year,” when property owners receive new notices of valuation. Officials with the Gunnison County Assessor’s Office have cited a higher number of property sales during the most recent reappraisal period for the changes.
By state law, a specific date is associated with each period of reappraisal. For tax bills received recently, that date was June 30, 2016. The assessor’s office looked at sales during the two years prior — and in some cases five years — to determine value on that date.
Property taxes due are the result of two main factors: a property’s assessed valuation multiplied by the mill levy for an area — or total tax rate assessed by government entities, such as the school district, county and others.
For example, the total mill levy in the City of Gunnison increased from 55.624 to 55.842 for 2017.
Renovations add to cost
Cooper agreed with Alter about building conditions. He said many of the commercial properties on the market were built for specific purposes and need retrofitting. The cost of making such renovations also may be a factor in deterring buyers.
He added that obtaining lending for a commercial property also has become a barrier to commercial property ownership.
KOA Campground owner Dave Taylor owns the former “Trough” restaurant on Hwy. 50 a mile west of the city. The property recently went under contract after sitting on the market more than three years. While Taylor seemed unconcerned about the length of time it took to sell, he reflected on action he should have taken when putting the building up for sale.
“Hindsight is 20-20,” Taylor said. “What I should have done was gutted the building and sold it as a shell. No one wanted to buy it as a restaurant.”
Cooper also said lending conditions are vastly different from purchasing, say, a home. Commercial lenders typically require a 30 percent down payment and amortization may only go as long as 20 years.
Gunnison Bank and Trust Vice-president Chad Zummach said those lending conditions are typical for investment properties — where an owner intends to lease the building — but better options are available for someone starting a business. His bank partners with the Small Business Administration (SBA) to give those who intend to occupy a property with their own business a better deal.
Typically, the SBA will finance 50 percent of the loan, while the bank will cover up to 40 percent. The buyer may only have to put up 10 percent in the purchase.
However, Zummach said, the loan requires an “intensive financial review.”
Yet, Cooper suggested that with the combination of a purchase price, taxes, the cost of renovation and challenges of financing, some buyers may be hesitant to invest. Each of those factors, he said, cuts into an investor’s rate of return.
“The numbers just don’t add up,” Cooper said.
Changing the look of main corridors
As properties sit idle, prices decline. On a summary report of the 12 commercial properties currently on the market, Cooper wrote in price reductions which have occurred in recent months.
He opined that as properties grow less expensive, they become attractive to other businesses rather than restaurants and retail stores. That, he said, can change the look of a downtown commercial area — where trendy coffee shops may be replaced by, say, an auto parts store.
Gunnison County Commissioner John Messner — who also owns commercial property in downtown Gunnison — agreed with Cooper’s assessment. Rather than netting a 6-8 percent return, under current conditions, an investor may only garner 2-3 percent.
Yet, one way to attract outside investment into the Gunnison commercial real estate market may be on the horizon. A new program designed to address uneven economic recovery and persistent lack of growth was born out of tax reform passed by federal lawmakers in January.
In the broadest sense, the newly enacted federal Opportunity Zone program provides a tax incentive for reinvestment of unrealized capital gains into low-income urban and rural communities.
The program includes opportunities for investment in startup businesses and other types of capital improvements. For example, if an investor puts money into a building to launch a business in a designated Opportunity Zone, the investor can defer or reduce capital gains depending on the amount of time he holds his investment.
While the details of the program are still being worked out, Gunnison recently was designated as one of these Opportunity Zones.
“You can take a 2 percent or 3 percent marginal investment, but because of the benefits you get from this Opportunity Zone tax break, now it becomes a 10 percent return on investment,” said Messner.