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

[Chris Collins]

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

[Oren K.]

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