What to value a mixed multi-family commercial in Philadelphia

Question

Hi Folks,

My grandpop is liquidating his mixed use apartment complex and I'm looking into purchasing from him. Wanted to know what ya'll would value this deal at. They plan to list for 575k which makes zero sense based on the numbers. I also do not live in the area anymore (from there) so don't know much about the market, but it seems Philadelphia government does not do much to invest into the area as everything looks the exact same as it did when I was a kid there in the 80's or worse. Also taxes are very high (17k).

The numbers:

Appraisals: 528k-560k- ?? (not sure where they pulled 575k except for high side comfort)

Gross Income: 70500

Expenses: 38k (excludes probably low family mgmt fee's and there has been 0 vacancy in this property for many years).

Unit info:

4 - 1b/1b (unsure of sqft but est 750sqft)
2 - 2b/1b (I est 850sqft)
1 - bottom floor office, support up to 15 employees. The footprint it sits in is 2100sqft, unsure how much is usable.
Laundry leased assets in closet nets 220/yr.
Individually metered electric (heaters), no HVAC (standard for that area and age unit), but building utilities run 5k/yr - probably business utilities not being paid - unsure. Utilities could be levied back on lesees by sqft basis.
Shared parking lots. Limited exclusive parking for business.
Sits on a busy metropolitan street (1 lane).
Gross bldg sqft: 7800 sqft

4 of the units rehabbed with builder grade kitchens, carpets within last 4 years.

2 units will need similar work (~4k/unit).

Potential capital expenses: 1 of the flat roofs is 10-15yr old. Est 4k replace.

Water heater 100g: 10yr old, est $1500

Rents are currently under market by about 5%. The office space is renting at about $6/sqft/yr but a search in that area reveals nothing less than $10/sqft/yr for similar units. Long term tenant, rent should be increased immediately I'd think.

My numbers don't look good at all, 6.5% cap rate. When rents increase to market rates, I estimate gross income 82k. Unsure of lease agreement end, all but 2 are within the year, so should be able to markup immediately on most.

Even after markup, I can barely achieve a 7% and the cost of capital at 7.5% interest rate drains all the income. I think growth in the area is mediocre and the best case for this property is to buy out the attached business in the back and rent that as well, then hold for commercial redevelopment of the land.

Since it's in a light commercial zoned area, maybe the units could also be converted into pure office space which may yield better. Unsure of this. Given $10/sqft/yr min nets 78k, maybe not. Limited parking could be an issue.

What would you pay? What factors do you look for most to decide what to offer? For me, I'd like high cash flow with opportunity of improvement and sale in 3-5 years. This property appears to not satisfy either.

Caleb Heimsoth · Answer

@Leland Smith There’s so many ifs on this deal. Why are there so many ifs if family is selling it? Get all the facts. There sounds like little upside so unless you have 25-35 percent down or your grandparents want to give you a discount this is probably not a deal

Mark Creason · Answer

@Leland SmithPennsylvania has a high transfer tax. At least 2% depending on the county. I don't think you are accounting for this.Mark

Leland S. · Answer

@Andrew Beauchemin - GlensideYa I figured there were people happy to part with cash to make steady income even if it's 6%. If I had millions and was worried about market risks I might do the same. But still owning a building and tenants is market risk. The reason they've enjoyed 0 vacancy is because they are undercharging because, well he had a 150k mortgage paid off a few years ago! I guess I've done my homework, I was just curious to hear from others what they use as a guidance for the deal to be worth it to them. If you're saying people are happy in the 5's then I guess I better just use my cash elsewhere!

Ali Hashemi · Answer

Maybe start workin’ grandma and get her to help nudge the old man your way ;)Side note maybe work a contingency buy where you offer to buy at a certain price unless he gets a higher market offer. And certainly save commission costs for him by working directly w the title company yourself.

Ali Hashemi · Answer

Don’t know anything about Philly market, but I’d say timing is in his favor right now. Mixed use is hot and if it truly has had 0% vacancy that tells me is good location and will sell easily. If you’re unsure of usable commercial space you need to verify. Maybe some upside if you split into 2 commercial spaces. Hopefully you’re the favorite grandkid and can negotiate a better purchase price :)

Andrew Beauchemin · Answer

@Leland Smith What part of Philadelphia is the property in? I would argue that there has been massive amounts of capital investment over the last few years. There is a very attractive 10-year tax abatement that the government offers to qualifying buyers / developers. Market cap rates continue to push into the low 5%'s, and I'm seeing new & renovated buildings sell for mid-high 300k's per unit in the right areas.I'm happy to share some market data and offer opinions where I can. Feel free to send a PM.

James Dickens · Answer

@Leland Smith I'm new at this but I agree with you those number just don't work when you calculate it out. Not sure what you came up with but just using rough figures I have the offer price at just over 200K? After some assumptions (vacancy, expenses, capital reserves and debt service if you are not paying all cash) shows about 14k cashflow per month but only if you could get it at that 200Kish price. Using the 528k price it shows you would be in the hole about 5K first year with the same assumptions. Those are my numbers anyway. Your numbers may very.