Valuing an inherited commercial property

[Dave Wittnauer]

I had an Uncle leave me a property, and an expensive mortgage, after his death a couple months ago.  I am really in over my head.  I have an appointment with a commercial real estate agent early next week to talk about selling, but I am wondering what I should be doing to try and understand the building's value so I know that I am being treated fairly?

I have thought many times over the past couple months about trying to make it work but I really don't have a great deal of patience for dealing with tenants (there are 11) and the calls, questions, etc.... are really driving me nuts.  There isn't enough money left over after expenses each month to afford a property manager and I really don't like being that person.  

The property was purchased in 2006 so a premium was paid.  If someone made enough of a downpayment, I'd think the place was a cash cow for someone.  I'm really not sure though since this isn't my area of expertise. 

[James Storey]

@Dave Wittnauer valuation of these multi tenant buildings can be a challenge considering the tenant mixes and various lease terms and duration's. To tell you the truth, from my experience of underwriting these properties, without going through the details of your property, it is very challenging to give you concrete detail in the valuation of these types of buildings because there are so many factors. Factors such as:

• Lease terms (duration and escalations)
• Market comparables (similar buildings selling CAP rates)
• Tenant mix
• Credit of Tenant
• Location of building
• Highest and Best use of the building
• Value Add possibilities
• Condition of building
• etc

In the end @Brett Peters is right, it all comes down to the income the property produces in the form of NOI (Net Operating Income) capitalized (divided by) by a CAP rate. This means that the lower the CAP rate, the higher the valuations, and the higher the CAP rate, the lower the valuation. CAP rate and Value are inverse to each other. However, determining a market CAP rate for your building isn't necessarily super straight forward because of the various factors listed above which take a more detailed and experienced approach. If I were you, I would talk with multiple brokers to determine the best bet. In the end, if the broker is not educating you on the process and why they recommend a value, then that might not be the right broker for you.

In my experience, these multi tenant office and/or retail buildings have a high enough CAP rate to justify a mortgage assuming it doesn't have a large vacancy but it all comes down to the right buyer.

James Storey, CCIM