Commercial Properties - where do i start? Tenants, comps?

Question

I know LoopNet has listings, however looking for guidance – comps? Past listings? What about tenants…any recommendations on where to start on what we could charge on renting out the space?

We often come across commercial property owners who are interested in selling, but have no clue where to start on really being able to identify what the property is worth.

Any insight would be great!!

Sameer Bhalesha · Answer

Account Closed

NEVER USE ACTIVE COMPS. You must buy commercial data, such as Costar or Reonomy. 4 methods exist on valuing commercial real estate. Land, Net Income, Asset Comparables, and Construction Cost.

VALUE #1 is to find sold comparables of land around the property. If you can buy the property cheaper than land value, you probably got a deal.

MAX OFFER = (.70 X VALUE #1) - demolition

VALUE #2 is NET INCOME then divided with the CAP rate in the area. The cap rate differs for locations and asset types. VALUE #2 = Net Income/Cap Rate

MAX OFFER = (.70 X VALUE #2) - Repairs

VALUE #3 is Asset Comparables, you must find sold comparables of assets similar to the property in the same location. Offer 70% of VALUE #3 minus repairs.

MAX OFFER = (.70 X VALUE #3) - Repairs

VALUE #4 is the construction cost. How much would it take to demolish the property and build a new one just like it?

MAX OFFER = (.50 X VALUE #4) - Repairs

I use the first two valuations, land and net income to make a quick MAO offer to the seller!

Lizzie Carver · Answer

Account Closed Are you saying that you are interested in purchasing, but when you contact less sophisticated owners you are both at a loss for determining property value? It should be easy enough to put together an in-place cash flow and cap your NOI. If you want to build a pro-forma with market rents, the large brokerage firms release free research reports on their websites and you can always call brokers who will know the market and will have access to CoStar (though you have to tread lightly if you never intend to use a broker). I'm not sure the quality or pricing of CompStak but much cheaper than CoStar for a lease comps resource.

Kevin Dougherty · Answer

@Amanda Galindo

Commercial is a whole different machine as far as determining comps for vacancies, replacement cost, values, etc... if a seller truly wants to sell then you will need a qualified appraisal to assist in determining values and appraisals for commercial get costly, starting around $2k and going up depending on the asset that is being appraised. Maybe network with a couple of commercial brokers in your area and find one or two who you can potentially partner up with. It should be beneficial to everyone involved.

Giovanny Garcia · Answer

What size of a property are we talking here?  I ask because I have only dealt with 2-4 unit properties at this point.  But I believe the analysis is still the same it is just the Cap Rates for larger properties which I have not yet fully understood how to calculate and what makes a B Type versus a C Type etc.

I would use rent-o-meter, local property managers, and call similar apartment complexes to see what rent is priced for similar properties in the area.  With that information do the math to see what a property of said size would generate and thus what you could buy it for and still make a profit.  Using the calculators here on BP would be a huge help in this process.

Lizzie Carver · Answer

Account Closed in that brokers will really be your best resource and well worth the cost of cutting them into any potential deals given that these are more one-off and outside of your area of expertise/core business model, but can be very valuable to stumble upon.

Account Closed · Answer

@Sameer Bhalesha great! This gives me a nice starting point! Thanks! Will see what I can come up with

Account Closed · Answer

Hi Giovanny, with our lead system we end up with different types of properties in our hands – and really don’t have an end goal just yet, of exactly we are trying to do (Office Space, apartments, etc) .. Makes sense, how you are explaining the apt complex situation with calling property managers, using rent-o-meter. I think we are more stuck on what to do with the property – Example, we had an owner of a “Hot-Tub Show Room” interested in selling his space … it was just a huge open space (could be converted into multiple offices, different store fronts) …but we just had no clue where to even begin on that, so ended up passing.

Account Closed · Answer

Lizze, thank you for your response. & Yes, currently we invest into residential properties/land however, we have a pretty extensive lead generation system and often call off Tax delinquent list and end up speaking to owners who 1. Yes, don’t know what they want at all & or 2. Ask us to make an offer, which I am not even going to do without some type of knowledge into the area, comps etc.. The types of properties we come across range completely (because these are just like one offs for us) – we’ve had properties from ranging from restaurants, to open show rooms, to buildings with multiple different office spaces.

As an example, a hold up for us on the property with multiple office spaces – is can we find people to lease, what type of tenants, rental rates etc.. which your response does help a lot – I was not familiar with CompStak or CoStar, I am assuming they both require some type or real estate license. But will look more into in addition to brokerage research reports. Thanks!

Commercial Properties - where do i start? Tenants, comps?

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