My first commercial building analysis

[Henri Meli]

I need some help evaluating a commercial deal I have in mind. This is the first commercial property I’m interested in.

This property is a 17,300 sqrt class B commercial building located in Wake County, NC. The tax value of the building is $1,9million and the building is currently selling for $1.5 million. The building is currently 75% occupied. The out of state owner had stopped making any improvements the last 2 years and has been renting it below market value, just to keep it occupied. I have walked the building a few times: At night time, During the rain, at peak time and on the week end. It is in need of landscaping (trees growing out of control) and some work on the exterior. The property could use a new fence. The parking area also needs some improvement. Areas of the building need power washing.

On the interior, I have walked vacant units and on the naked eye they looked in ok shape. Carpet is good. The walls need fresh paint. The stairs will definitely some work (2 story building). The HVACs are a serious concern, and I have asked a an expert to map out the life expectancy of the various AC units to give me a clear picture.

I have met with lease specialists in the area to discuss what could be done with vacant spaces. I have requested and reviewed comps from similar buildings leased in the last 12 months at 2 miles radius.

Below are some annualized key operating data points.

Income: Potential rents: 233k (Occupied: 160k, Available at market rate:73k)

Expenses: Taxes 25k

Insurance: 3k

Elevator Inspection/Maintenance: 2k

Management Fees: 12k

Repairs and Maintenance 2k,

HVAC 8k, 

Electricity 25k,

Janitorial 14k,

Landscaping 7k,

Water, Sewage, Garbage collection: 7k

Others:

Total expenses: 105k

Pro format CAP Rate is around 8.

Any thoughts on these numbers? Anything I need to be aware of? Would you pay 1.5 million for this asset? Note that the formal inspection hasn’t happened yet.

Which approach would you take to negotiate an offer?

Thanks for your input.

[Howard Abell]

I think the first thing you should think about is not paying for any empty space. You should pay on the actual rent collections minus the expenses. It looks like on that basis NOI is 55,000. I know this sounds extreme but you need to start there and then determine how you will fill the rest of the space and how long it will take you. So paying on pro forma dollars outright would be a mistake since you have to do the work the owner has not done. You might ask the owner if he will do any seller financing if possible on this deal.