How do you value unused space when analyzing/making an offer?

[Jason Krick]

I will do my best to give a brief description of a property I looked at.  My question is to how determine a fair offer?  The building at one time was utilized as a rooming house, with an attached bar, and attached storefront.  The current owner made a huge 3000 sq ft+ owner's suite on the first floor.  He is renting out the rooms above him, which share a kitchen.  The addition on the back was where the bar and kitchen was, and there is an addition on the side that had a storefront.  Above the storefront he framed out two apartments and roughed in electrical and plumbing.  The building is over 14,000 sq ft.  There is also a huge barn in the back with 4 oversized garages that could produce income.  I walked it twice with my contractor and with my lender.  I wanted my lender to see what needed to be done as far as improvements.  It's a big project, but can easily be done in stages.  My plan would be to walk off a few areas, knocked down a few walls, and convert it into 9-11 apartments.  It would require approval from the Zoning Board, but I've dealt with them on my current project, and I have a good relationship with them.

Let's say the asking price is in the $200,000 range. However, if I strictly take his income and stated expenses (unverified), I get a value of around $100,000 at an 8.5 CAP, which is what my bank uses when appraising. For the sake of my question, let's assume I can get zoning approval and rehab costs will be $175,000. I can generate 700-800 average rent per unit, per month. At the above numbers, if they hold true, I can make it work at asking price. But I'm not sure how my bank will value it, based off of current NOI.

So, with roughly 11,000 sq ft currently bringing in $0 income, as well as the garages bringing in $0, how would you value a property like this? NOI only? Do you consider the value of the unused structure at all?

Thanks in advance for your insights.