Help Me Value This Commercial Property...

[Cameron Paterson]

I'm new to this, so I apologize in advance if I miss something basic. I'm just trying to understand the best way to value a commercial property. I just read an entire book that talked about CAP rates, and now I'm finding not to use this method....

This is a retail building with 6 or 7 tenants, some who have been there 10+ years.  The building is older, but in good shape, with busy street frontage and a national chain in the main front spot.

Total Income (CAM, Late Fee, & Rental):  $375K  (100% Leased Last Year)

Repairs:  $50K
Utilities (Owner Paid):   $27K
Property Tax (Owner Paid):  $32K
Insurance:  $9K

Net Ordinary Income:  $257K

Est Vacancy:  $43.5K  (13% of Rental Revenue.  The area's average is 20%, but this property's history is very good)

Estimated Yearly Income:  $213.5K.

CAP Rates in the area are 5-8.5%. I'll go with 6.5%. Value = $3.3M.

However, with a standard 25% down loan, loan amount is $2.475M.  At 15 Yr, 5%, yearly P&I is $235K, for a negative cash flow.  Yikes!  I see why this doesn't work.

If I use a CAP rate of 8.5%, value is about $2.5M, and P&I is $178.5K, for $35K cash flow.

In this scenario, down payment is 627K, for a COC of 5.5%. Still not very good...right?

I know a lot goes into this, but how would you value this property and how much would you pay for it?