I need help analyzing a deal for a building for my HVAC company

Commercial Real Estate Investing
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I need help analyzing a deal for a building for my HVAC company

Chris Collins
Rental Property Investor · Novelty, OH · Member since 2016 · 42 posts · 27 votes

Thank you for taking the time to read my question.  I currently own (2) duplexes and (2) single family rental properties, so I have limited real estate experience.  I have no experience analyzing commercial property.

Long story short, I own a commercial/industrial heating and air conditioning company.  We currently rent 4800 sq feet and need  more room.  Instead of renting a larger space, it seems more prudent for me to purchase a property and have my company rent from me.

One of our customers has an industrial/mix use property for sale that is 23,400 square feet in the area which I am looking (east side suburbs of Cleveland, Ohio).  The property is broken up into (9) 1800 sq foot units (building 1) and (5) 1440 sq foot units (building 2).  Each space has a 12x12 over head door.  

My company would take over building 2, and the build out would be done through the company as leasehold improvements.

With my company taking over 7,200 square feet, the building would be at 100% occupancy.  

The property is currently triple net lease. Utilities are individually metered. Rents are $5 per square foot.  Taxes on the property are around $25,000.00 and i am projecting insurance to be $8,000.00.  I have figured a 10% vacancy rate.

The property is listed for sale for $950,000.00

Based on my initial analysis, the list price seems pretty high.  I end up with slightly negative cash flow.  However, I am by no means a commercial expert. How would you value this property?  What would be a reasonable offer?  Are the sales price and a reasonable offer too far apart to make a deal work?

Bigger Pockets has always been helpful.  Thank you in advance for your insight and expertise.

Chris

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Oren K.
Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes
9y

Chris,

So as it stands, the ~16K building is occupied and generates ~$80K in gross rent. Deducting the $33K for taxes and insurance, that leaves an NOI of $47K. At a price of $950K, that is a 4.9 CAP deal for a mixed use / industrial property in an area that I believe has a lot of that type of product available. Another metric to consider is that they asking ~$41 per sq ft. There is lots of industrial property available in the Cleveland area for under $10 per sq ft (if you are interested, I have a 20K space we can talk about).

I did a quick search on Loopnet and there seems to be a number of vacant properties in the 5 - 10K sq ft range for sale at a lot less they are asking. I would connect with some of agents / brokers that deal with commercial / industrial in the Cleveland area and tell them what your 'ideal' criteria are, what you are willing to compromise on and have them do some digging. Not going to cost you any more and will likely yield additional options to consider.

But lets assume you buy, fix up and now pay yourself the $5 per sq ft. The property will generate ~$135K less the same 33K for taxes and insurance leaves you with ~$100K but cost you somewhere between $975K - $1MM ( using the asking price and assuming improvements of $3 - $7) which is around a 10 CAP.

From my perspective, they are selling you the property as if the 'lift' in value is already done. Having said that, this configuration has / may have particular value for you which allows you to consider paying a premium. How much of a premium is up to you.

Good luck,

Oren

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  • Priyanshu AdathakkarPro Member
    Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    9y

    @Chris Collins what would be the vacancy without you taking over 7,200 SF? Calculate the income without you in the space and see what amount would give you 8% CAP, that will be your offer price.

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  • Oren K.
    Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes
    9y

    Chris,

    So as it stands, the ~16K building is occupied and generates ~$80K in gross rent. Deducting the $33K for taxes and insurance, that leaves an NOI of $47K. At a price of $950K, that is a 4.9 CAP deal for a mixed use / industrial property in an area that I believe has a lot of that type of product available. Another metric to consider is that they asking ~$41 per sq ft. There is lots of industrial property available in the Cleveland area for under $10 per sq ft (if you are interested, I have a 20K space we can talk about).

    I did a quick search on Loopnet and there seems to be a number of vacant properties in the 5 - 10K sq ft range for sale at a lot less they are asking. I would connect with some of agents / brokers that deal with commercial / industrial in the Cleveland area and tell them what your 'ideal' criteria are, what you are willing to compromise on and have them do some digging. Not going to cost you any more and will likely yield additional options to consider.

    But lets assume you buy, fix up and now pay yourself the $5 per sq ft. The property will generate ~$135K less the same 33K for taxes and insurance leaves you with ~$100K but cost you somewhere between $975K - $1MM ( using the asking price and assuming improvements of $3 - $7) which is around a 10 CAP.

    From my perspective, they are selling you the property as if the 'lift' in value is already done. Having said that, this configuration has / may have particular value for you which allows you to consider paying a premium. How much of a premium is up to you.

    Good luck,

    Oren

    1Reply
  • Matthew King
    Apartment / Investment Broker · Cleveland, OH · Member since 2016 · 107 posts · 68 votes
    9y

    @Chris Collins I am familiar with the Willoughby property you are speaking of. You are indeed correct that this is overpriced based on the market. Two big items to consider when looking at these multi tenant properties is What is the roof condition? (obvious) but a big one that is often overlooked is: Who is responsible for the mechanical repairs and replacement per the NNN lease agreements. Good Luck!

    1Reply
  • Chris Collins
    OP
    Rental Property Investor · Novelty, OH · Member since 2016 · 42 posts · 27 votes
    9y

    @Matthew King would you mind sharing what you believe fair market value is for the property via direct message? I can easily inspect the roof (and would, depending on how far the discussions go). Mechanical fixes are not part of the NNN, however, are an easy item for me, as that is what my day job is. I have very deep knowledge about the property as we have a maintenance/repair history over the past 10 years.

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  • Chris Collins
    OP
    Rental Property Investor · Novelty, OH · Member since 2016 · 42 posts · 27 votes
    9y

    @Oren K. I would certainly be interested in the 20k space.  Do you mind sharing where it is located?  As far as the property mentioned, it is right down the road from where we currently are, which is a benefit, as we have a lot of customers in the area and would make the move easier.  I also have knowledge about the mechanical systems in the property as we have serviced and maintained them over the past 10 years.  

    With that said, I am not much for paying a premium with anything.  I would rather buy at a discount and add value.  Thats why I wanted to be sure that the property is over valued before I move on.

    For what its worth, there is a single family house out front that he is "adding to the deal" which would bring 950-1000 in rent.

    Thanks,

    Chris

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    Single family house (out front)? What does that mean? So with the building from the road you can barely see the space your business would occupy?

    Are you allowed any billboards on the site, monument or pylon signage? How many cars drive by the site a day? Have you researched the department of transportation to see if traffic is increasing,decreasing, or staying the same year over year? What are the zoning plans for the area versus the current land use plan to the 10 to 20 year outlook of the future land use plan?

    How is the FLOW of the building and other tenants? Adequate parking? Will your employees even though having more internal space be able to get in and out of the site in an efficient manner? Is there a clean phase one  for the property? Is the seller on a master insurance policy that is cheaper than what you will be paying? Will property taxes rise once you buy the property because current assessment is much lower? When do tax bills go out and what are the appeal timelines?

    Is the roof the older type systems or the newer higher raised roofs? Most businesses these days like the raised roofs because of warehousing and storage needs. There is so much more that goes into this decision than just the cash flow or purchase price of a property when your business is involved. 

    More presence in the community could raise your business profile and generate additional sales over time.

    Your existing business base if you put this location on a map is it centrally located for the clients you service? What about as you expand does the site fit in to expansion plans and ideal service areas? You could find even though you are down the street from this site that a lot of your business growth is coming from a different area.

    Business owners tend to put business metrics first but still are cautious about the numbers of the building they are looking at buying. If you occupy 50% of the space you might buy then you could look at SBA lending.  

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