Distressed Industrial Acquisition Financing: Vacant Building, Cleveland Ohio, 90-Day Close

The Situation

A Cleveland-based opportunistic investor with a track record of value-add industrial acquisitions identified a 120,000 square foot warehouse in the city's southeast industrial corridor. The property was offered by an estate executor under liquidation pressure at $2.1 million, or roughly $17.50 per square foot. Comparable stabilized industrial assets in the submarket were trading at $28 to $32 per square foot, implying a stabilized value of approximately $3.5 million once leased. The discount existed for one reason: the building had sat vacant for 28 months and required serious capital attention before any tenant would sign a lease.

The physical asset was fundamentally sound. Clear heights of 28 feet, 12 dock-high doors, 3-phase power, and a column spacing layout consistent with modern logistics use. A commercial property condition assessment flagged deferred maintenance and capital improvements totaling $380,000: roof membrane replacement ($140,000), dock leveler and door upgrades ($95,000), HVAC and electrical updates ($85,000), and site work including parking lot resurfacing and lighting ($60,000). None of these were structural. The building just needed money and a tenant.

The investor had roughly $700,000 in liquid equity to deploy and needed financing for the balance of the acquisition plus a portion of the renovation budget. The estate executor had already passed on two offers that could not close in time. The investor negotiated a 30-day close contingency with a hard earnest money deposit. The deal was real, the discount was real, and the clock started immediately.

The Challenge

Conventional lenders -- bank portfolio lenders, credit unions, agency programs -- underwrite to current income. A building with zero occupancy and zero rent rolls produces a debt service coverage ratio of zero. There is no DSCR calculation to run because the numerator is empty. A conventional lender might acknowledge the stabilized potential, but their credit policy requires demonstrated income, typically 12 months of operating history at stabilized occupancy. A 30-day close timeline made the conventional route a non-starter regardless of collateral quality, since commercial bank credit approval alone routinely takes 45 to 75 days. This deal had no income, no occupancy, no operating history, and a hard close deadline. Every conventional lender passed without a second conversation.

The complexity did not stop at the income gap. The renovation budget introduced additional lender risk: draw management, construction completion guaranty, and cost overrun exposure. Most bridge lenders who will finance vacant industrial still want to see a leasing pipeline, a signed letter of intent, or at minimum a formal marketing effort with documented prospect activity. The investor had none of these at the time of application -- just a well-researched thesis on the submarket's tightening industrial vacancy rate (then at 4.2% in the southeast Cleveland corridor) and a detailed renovation scope. Structuring a loan that would satisfy an asset-based lender's underwriting without income support required a specific approach to collateral valuation and loan sizing.

Our Approach

CLS CRE approached this as a pure asset-based financing from the first underwriting conversation. Hard money and private bridge lenders underwriting vacant industrial do not use a stabilized income approach because there is no income to stabilize yet. Instead, the underwriting anchors on two values: as-is appraised value and replacement cost. For a 120,000 SF industrial building in Cleveland, replacement cost (land plus new construction) was running approximately $52 to $58 per square foot, putting replacement cost in the $6.2 to $7.0 million range. Acquiring the asset at $17.50 per square foot -- less than 35% of replacement cost -- gave any collateral-focused lender a deep margin of safety even in a distressed exit scenario.

We submitted the deal to seven private bridge lenders with documented Cleveland industrial exposure. Three came back with term sheets within five business days. The winning structure: a $1.55 million acquisition bridge loan at 73.8% of the $2.1 million purchase price, interest-only at 11.5% annually, with a 12-month initial term and one 6-month extension option. The lender also committed a $285,000 renovation holdback funded in draws against completed scope, bringing total loan commitment to $1.835 million. Origination was 2 points ($36,700). Monthly interest carry on the acquisition balance: $14,879. The investor brought $550,000 to closing covering the equity gap, origination, and initial reserves. The 30-day close was met with four days to spare.

The renovation holdback structure was equally important as the acquisition sizing. Rather than requiring the investor to fund all $380,000 upfront and seek reimbursement, the lender agreed to fund 75% of each verified draw, with the investor contributing the remaining 25% as draws were released. This preserved the investor's working capital through the construction phase and avoided a cash crunch at month two when the roof work peaked. Total renovation funded through draws: $285,000 lender, $95,000 investor. The renovation came in on budget at $378,000.

The Outcome

Renovation completed in month three. At month four, a regional logistics operator signed a 7-year NNN lease at $4.85 per square foot annually, generating $582,000 in gross annual rent. With NNN expense pass-throughs, effective net operating income to the landlord was $558,720 (applying 4% management and vacancy reserve). At that income level and a market cap rate of 6.75% for stabilized Cleveland industrial, the stabilized value reached $3.7 million -- above the original $3.5 million estimate due to the above-market lease terms the investor negotiated by delivering a fully renovated, move-in-ready facility. At month 14, CLS CRE closed the permanent takeout: a CMBS conduit loan at $2.4 million, 65% LTV on the $3.7 million stabilized value, 10-year fixed rate at 6.85%, 30-year amortization, non-recourse. Monthly debt service: $15,791. DSCR at close: 2.95x ($46,560 monthly NOI divided by $15,791 monthly debt service). The loan paid off the bridge in full, returned the investor's original equity, and generated a cash-out above the investor's total invested capital.

The investor retained ownership of the fully leased asset with a non-recourse, 10-year fixed permanent loan in place, a 7-year NNN lease with contractual 2.5% annual rent bumps, and approximately $1.3 million in equity value against the CMBS loan balance. The bridge lender was repaid in full at month 14. Total transaction time from first conversation with CLS CRE to permanent close: 16 months.

Key Takeaway

Vacant industrial assets at deep discounts to replacement cost are financeable, but only through lenders whose underwriting framework starts with collateral value rather than current income. The critical first question for any hard money underwriter on a deal like this is not "what does it cash flow?" but "what is the land worth, what would it cost to build this from scratch today, and what does the exit look like at stabilization?" When replacement cost is $52 per square foot and acquisition cost is $17.50, the margin of safety is so wide that an asset-based lender can fund the deal even with zero occupancy, provided the renovation scope is credible and the sponsor has demonstrated execution ability. Investors who understand this framework can compete effectively for distressed industrial assets that conventional borrowers cannot finance, buy at discounts unavailable to institutional buyers who need bridge-to-perm certainty before closing, and capture the value creation that happens between vacant and stabilized. The 30-day close is not a gimmick -- it is the mechanism that earns the discount, and a well-structured hard money loan is the only tool that makes it possible.