Estimate Expenses on Commercial Medical/Office Strip for sale

[Joseph Parker]

My experience consists primarily of residential multifamily properties (owned, managed, sold a 24-unit building). I've decided, at least for now in my market, to focus on commercial office/medical/service investment properties because I'd rather deal with business owners, during business hours, than low-income residential tenants. 

Recently, an 8-unit building was listed for sale in a good, high traffic location just a few miles from my home. Currently fully leased, including six medical office tenants, one long-time successful nail salon and a long-time successful women's retail shop. Current owner hasn't kept the best record upkeep, as five leases expired years ago and are on a month-to-month, with the other three leases expiring this year. I've been told that ALL tenants have no desire to move and will sign a new lease if/when needed. I would assume that most lenders would want a contingency on the purchase of getting new leases signed prior to closing. The owner also hasn't increased rent by a single dollar for some tenants in 8-12 years but that's another topic!

The reason for my post is this: having experience in residential properties and not so much in commercial, what is the best way to estimate expenses such as maintenance/repairs and capital expenditures when doing my analysis? The owner has provided the listing agent with the following details:

Asking price $795,000 (too high in my opinion, but it has been for sale in years past so I have to think the owner is motivated - so far, numbers only look good in the mid 600k's as a purchase price)

Annual gross income $103,000

Property Taxes $11,000 Insurance $3,500 Utilities (water, sewage, outside lighting) $8,200. That's it, so income less those expenses is $80,300/yr.

I wasn't given the details of the seemingly high utility costs as all tenants pay their own gas, electric and trash disposal. Besides being told that the roof is brand new in 2019, asphalt lot resealed in the last few years and all AC units replaced in last five years, I wasn't given anything else just yet.

From your experience, what % of income is typically the most appropriate to use when estimating other costs like repairs, CapEx, etc.? The building is solid construction built in 1961, 11,000 sf, well-maintained exterior so not much deferred maintenance, if any at all. Located next to a newer Walgreens, Ruby Tuesday and popular liquor store with an Applebees, Outback Steakhouse and Starbucks nearby.

I was being what I feel is conservative and estimating $7,000/yr for repairs and another $10,000/yr for CapEx, plus $2,000/yr for snow/lawn care and 8% vacancy allowance or $8,200/yr.

Any advice, tips or suggestions would be greatly appreciated!

[Joseph Cacciapaglia]

I would be very hesitant to buy a commercial property, if the owner wouldn't share their actual historic financials. There should be no reason he can't produce operating statements, or at the very least past years tax returns. You will certainly have a difficult time financing the project without leases and actual financials. Of course, that's also why there may be a real opportunity. Figuring out your expenses is more difficult with this type of property, than with multifamily, because there is wide variation regarding which expenses the tenants pay themselves or get charged back for, and also what services you are providing. 

One expense I've seen with some retail centers that you didn't mention was a general marketing budget for the center itself. Not marketing to release vacant space, but to drive shoppers to the center, including a website, print ads, etc. I'm sure there are a ton of other expenses that I'm not aware of that you may run into. One thing I like to do when dealing with a property type that I'm not as familiar with, is run the deal by a good mortgage broker, and see how they would underwrite it, and what questions they ask. They are usually happy to train new borrowers for a specific property type.