Purchasing commercial property without good P&Ls

CO · Member since 2022 · 588 posts · 426 votes

2y

The first and arguably most important question I would ask is occupancy %. If they are 90% occupied and not Cash flowing then that is a huge no for me.

I have bought 2 small mom & pops like this already in 2023, and both didn't have detailed/great financials. It takes a certain level of risk tolerance to do it, and a high level of local market knowledge. If you know that improving the site can bring in 50$ extra a night, then you can incorporate that into the underwriting. It is hard because most of these places take a unique set of eyes and thought. Feel free to reach out and I would be happy to take a look at it and see what I think.

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Henry ClarkPro Member

Developer · Member since 2020 · 4k+ posts · 4k+ votes

2y

Commercial appraisals are performed three ways. Cost basis, comparables and revenue basis.

Cost basis is usually a low estimate since costs have increased dramatically in the last 3 to 4 years. Recommend you do a cost to build estimate.

Comparables- are there similar properties that have sold?

Revenue base- is it based on actual or estimated? Build your own estimate. Use different scenarios. Stress test.

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Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

2y

To be clear, this is a hotel property, right?

While an appraiser will likely use cost basis and income capitalization approach valuation methods, they ultimately need to lean on one.

Income capitalization approach is likely to be thrown out given the mismanagement of the property. As such, the appraisal would most logically fall back on the replacement cost + land value.

Ultimately, you are buying a business that relies on real estate. This is a full redevelopment deal, where you are ONLY buying potential. Whether you buy this property or buy acreage next door and build the exact same property, your income stream is 100% potential.

Now, things to think about:
1. Do you want to be in the hospitality business? Hiring desk workers, cleaners, servers, cooks, etc.
2. Is there really any demand for hospitality in this area? While there sounds like you have lots of ways to improve operations, it doesn't seem like the property is really in demand for either buyers or guests.
3. How are you going to finance the deal? Again, this is a hospitality BUSINESS. If you have no experience in hospitality, you will likely need to bring on an operating partner.
4. Towards what to pay for this: it is clearly an undermanaged property with little to no interest from buyers. The upside is, that means you have more bargaining room. Who cares what the appraisal says. What is it worth to you? Assuming they didn't just drop the price, it doesn't sound like it is a 2.9mm property. These sellers are going to need to find a unique buyer that wants to run a resort in TX. There are not a lot of those people out there. And if not a resort, the value of the property to anyone else is likely land value LESS demo costs.

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John M.

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 796 votes

2y

Make your letter of intent based on a cap rate. For example if the owner says he wants 3,000,000 then you say fine as long as revenues are = to a 10% cap or whatever starting out cap rate you think you are comfortable operating with. You can buy based on potential but you HAVE to know the current cash flow before you do so. Ask for a long due diligence period so you can figure this out. It's a bit of a red flag to not share financials out of the gate, but you can get there by keeping the conversation going. Who knows maybe there is a diamond in the rough. Or just maybe it's an expensive lump of coal.

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Don KonipolBusiness Member

Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

2y

Quote from @Aimee Haasteaby:

Hi all,

My husband and I are interested in buying a resort for sale in TX but the owners won't share the financials because they didn't keep good records. The agent says it's not a cash-flowing property but has huge potential because the owners aren't maximizing all resources (eg restaurant onsite not being used, available space for additional cabins or RV spaces, little to no marketing, festivals,etc).

The owners had an appraisal done on it but because the appraisal was done with their other resort, they can't share the appraisal but they did share the value.

The agent shared some numbers but not enough to substantiate the purchase price.

Asking price $2.9m

Appraisal $3.25m

On market for 1.5 years

$50k in reservations so far for 2024

Sellers offering $500k financing in 2nd position

They'll share financials once we see the property and put in an LOI.

Can someone explain how commercial appraisals work? Do they consider the crappy P&Ls in this case?

What other questions should I ask?

I've also been told not to buy anything based on potentials but what can I do in this situation?

Would greatly appreciate any advice or input on this situation because we're very interested in the property and feel like because it's been for sale for so long that we might have a chance at getting the price down.

Thanks!

To be successful as a resort property owner you need either
1- A LOT of knowledge and experience in the resort business and a lot of time to manage it
2- LOTS of capital to cover initial and seasonal operating losses and to pay an experienced competent property manager and operations manager

As for properties that lack verifiable financial and operating information, I expect a huge discount or I am not interested. It’s like buying a house at a foreclosure auction where you’ve never seen the inside or been able to do an inspection. Big discount for me to be interested.

On the market for year and half. The seller hasn’t accepted that he can’t sell for the same price as if he had excellent financials, tax returns available, and operating at peak efficiency. At some point he’ll either accept that and sell for a realistic market price, or just have it on the market until his estate sells it.

I know some people go after these type situations and hope to convince the seller to lower his price significantly and provide more information. If you feel like spending some time at it, go ahead. But these are low success situations. The kind where you show interest or deliver LOI on 20 properties and get one contract accepted.

Private Mortgage Financing Partners, LLC

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Kristi KandelPro Member

Developer · Fort Myers Beach, FL · Member since 2018 · 383 posts · 195 votes

2y

Quote from @Evan Polaski:

To be clear, this is a hotel property, right?

While an appraiser will likely use cost basis and income capitalization approach valuation methods, they ultimately need to lean on one.

Income capitalization approach is likely to be thrown out given the mismanagement of the property. As such, the appraisal would most logically fall back on the replacement cost + land value.

Ultimately, you are buying a business that relies on real estate. This is a full redevelopment deal, where you are ONLY buying potential. Whether you buy this property or buy acreage next door and build the exact same property, your income stream is 100% potential.

Now, things to think about:
1. Do you want to be in the hospitality business? Hiring desk workers, cleaners, servers, cooks, etc.
2. Is there really any demand for hospitality in this area? While there sounds like you have lots of ways to improve operations, it doesn't seem like the property is really in demand for either buyers or guests.
3. How are you going to finance the deal? Again, this is a hospitality BUSINESS. If you have no experience in hospitality, you will likely need to bring on an operating partner.
4. Towards what to pay for this: it is clearly an undermanaged property with little to no interest from buyers. The upside is, that means you have more bargaining room. Who cares what the appraisal says. What is it worth to you? Assuming they didn't just drop the price, it doesn't sound like it is a 2.9mm property. These sellers are going to need to find a unique buyer that wants to run a resort in TX. There are not a lot of those people out there. And if not a resort, the value of the property to anyone else is likely land value LESS demo costs.

100% what needs to happen in this case. I would only proceed with this deal if I really understood the market.

0 Reply

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

2y

Dont' trust anything from the seller. Just make an offer to get started. You need to see due diligence sooner rather than later.

you're not risking any money.

1 Reply

Jenna W.

Rental Property Investor · FL · Member since 2019 · 34 posts · 4 votes

2y

Quote from @Ronald Rohde:

Dont' trust anything from the seller. Just make an offer to get started. You need to see due diligence sooner rather than later.

you're not risking any money.

Agreed, and if you have no experience in running a resort like this, you want to do the following exercise IMO - you want to be a managing member, landlord. You want to be a silent business owner and bring in a resort management company to run the operations to forecasted revenues.

You will want to own this asset with a PROPERTY COMPANY (PROPCO) LLC. You will want to lease the property to an operating company for market rent (so if you can get FMV reduction in the sale perfect). This can be 3rd party tenant but it seeems more likely you want to share in the Operating Company (OpCo) cash flow if any.

You meet with a resort management company, review the asset and revenue centers and they will forecast what they could produce in terms of revenue in your market. The Property Company leases it the Operating company as an Absolute Net lease, and you collect a rent check monthly and pay the mortgage.

The appreciation on value, aka the equity in the asset will be owned exclusively by the real estate company and it's owners. It can be used to intercompany loan the operating company as needed, with interest. And, is yours to do with what you want. but don't try to run the resort.

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Purchasing commercial property without good P&Ls

Purchasing commercial property without good P&Ls

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