Commercial Property Seller - All new to me

[Jonathan Carter]

So today was exciting, I spoke with my first seller who sounded motivated :). I was driving for dollars and found a home with yard work needed. Called the owner and had a good convo. I made an offer on the house which he was not really thrilled about but he didn't say no.

He also mentioned he owns a small office building and is more inclined to sell that. (says "I'm not doing anything with it"). I'm not sure how to value commercial real estate and would like some help.

It would be awesome if an investor in the area would like to partner with me on this potential deal?

Location near: 1100 Dresser Ct, Raleigh, NC 27609 

1,200 sf

built 1980

Tax assessment: $130,000k

building class B (I think)

was last leased for $850 included most not all of the space (~900 sf)

Whats a good starting offer? 

I'm about to start researching now....but what are some obvious things to consider? Does the owner pay utils for office building? if so I would need to be well below the 1% rule.

Keywords: Durham, Raleigh, Chapel hill 

[Eric Weireter]

Hi @Jonathan Carter - 

I earn my W2 income as a commercial Property Manager and have over 700k sq. ft. in my portfolio (325k Class A Office / 400k Flex/Industrial). The first thing I will tell you about commercial tenants is... "refer to the lease." There are basically 3 types of leases: Percentage Lease, Triple Net Lease, Full Service Lease. A good lease will go into detail and outline who pays for what. I would assume a building of this size would be some variation of a Net Lease.

Type of Lease	Rent Basis	Often Used In
Percentage Lease	Base Rent + Percent of Monthly Sales	Retail Businesses; Malls
Net Lease	In additional to rent, tenant pays some or all of taxes, insurance, or maintenance.	Any commercial lease; usually favors landlord’s interests.
Double Net Lease	Tenant pays rent + taxes and insurance.	Any commercial lease; usually favors landlord’s interests.
Triple Net Lease	Tenant pays rent + taxes, insurance and maintenance.	Any commercial lease; usually favors landlord’s interests.
Full-Service Lease (aka Gross Lease)	Landlord directly pays all or most usual costs. These costs are often passed on to tenant in rent as a “CAM” charge.	Office, Some industrial and retail

As for who pays for utilities, multiple factors would need to be considered: lease type, # of tenants, meter setup etc. If the property is occupied by one tenant, one would assume the utilities would be in the tenant's name. If the property has a single meter, but multiple tenants, the utilities would probably be put in the owner's name and billed back to the tenants. 

In regards to valuing commercial, you are correct it is unlike residential valuations. Commercial properties are primarily valued using the Capitalization Rate. The Cap Rate is based on the income that the property is expected to generate and is used to estimate an investor's potential return on the investment. 

• The capitalization rate of an investment may be calculated by dividing the investment's net operating income (NOI) by the current market value of the property, where NOI is the annual return on the property minus all operating costs. The formula for calculating the capitalization rate can be expressed in the following way:
  Capitalization Rate = Net Operating Income / Current Market Value

Your scenario is tricky as when properties are vacant, or where the leases are set to expire in the upcoming year you are often forced to make some assumptions.

This just a quick & dirty of commercial properties as it relates to your original post. There are lots of things to consider beyond what was asked in your original post. 

If you want to chat more, feel free to PM me.

-Eric