All Forum Posts by: Kevin K.

LoopNet 

Crexi 

Well, considering your property is leased, they would most likely utilize the Income Approach. With the Sales Comparison approach as additional support. They’re going to add a few more expenses and deduct a vacancy/credit loss in addition to your taxes and insurance. I’m assuming your tenants are on leases which run over one year. 

So it might look something like this 

$48,000 - Potential Gross Income

(-4,800) (10%) - vacancy and credit loss

$43,200 - effective gross income

(-$6,000 ) - taxes and insurance

(-$5,000) CAM/ repairs and maintenance / common utilities 

(-$2,150 or 5% of egi) - management

(-$1,000) - misc/capital reserve/etc. 

=$29,050 net operating income

$29,050 / 7% cap rate =$415,000

From there they will assign a loan-to-value. I’ll assume 65%. 

So a total loan amount of $269,750.

The primary source of repayment is going to be the cash flow from the property. So they will formulate a mortgage payment. I’ll assume 4% interest, 5 year term/ 25 year amortization. 

So I’d look a bit like this $29,050/$17,086= 1.70 debt service coverage. Which is very healthy. 

Just note, all the inputs, cap rate, interest rates, etc. are assumptions. Theirs is just a quick back-of-the-envelope analysis of how the bank would look at it.

Great thread! 

I’m with @Joe Splitrock on this one.

You are most likely to scale faster with a partner, but the loss of 100% control, to me, isn’t worth it.

Moreover, I had two partners on another business venture that went south. So I’m like a bitter EX, lol.

A major lesson learned though.

If the property is only 40% occupied. I’d would deduct the lease-up costs off the asking price and that would be my offer, with maybe an extra 5-10% penciled in for risk.

So for example I’m going to make some assumptions about the building for simplicity sake. 

10,000 square foot building. 
market rent for the vacant space $10/SF. Asking price $1MM. 6,000/SF vacant. Market leasing assumptions: $5/sf for tenant improvements, 2 month free rent/ concessions, 4 months absorption (time it takes to lease-up), brokers commission 25% (7,7,7,3,3).

$1,000,000 - market value

(-$30,000- TIs)

(-$10,000- free rent)

(-$20,000- rent loss during absorption)

(-$15,000- brokers commission)

(-10,000 - entrepreneurial incentive -optional ) 

(-$85,000 - total lease-up costs) 

$915,000- Offer price

If you’re financing the property, just ask the lender if they’re going to require you to set up a reserve account until the property  is leased. 

Hope this helps! 
good luck !  

This is 100% my market. NYC and the boroughs have a ton of 100% rent stabilized buildings. Due to changes in 2019 it's very hard to increase rental rates on these units. Furthermore, there is no cap on your operating expense increases. As such, without getting to text book, your going-in cap rate might end up being higher than your overall return (IRR).

As you stated there is little appreciation with these properties. I can’t speak for your area, but rent stabilized product is going for 150-300 basis points higher than free market regarding cap rates around this area. 

Good luck!

Depending on how/if he’s going to finance it. The lender is going to base the debt coverage ratio off the current contractual rental rates, unless they’re grossly overstated.

You’re 100% correct though for his personal investment decision/offer. Assuming it’s a value add deal. 

As others have stated. The taxes are very low. Does that county reassess upon sale? Also, I’d apply a 8% vacancy/credit loss rate. 

Moreover, you’ve applied $0 for management. So I’ll assume you’ll be managing in yourself. You should still input a reasonable rate for your time in order to make a apples to apples comparison to other more passive investments. Some investors will figure out how much actually time will be spent on this aspect and multiply  that by a perceived rate their time is worth (almost like an opportunity cost) So 50 hours a year x $25/Hour = $1,250 in yearly management. 

You may be able to pay additional money to expedite the appraisal. The bank is using that appraiser due to them already being on their approved list and knowledge of the market, assignment, etc..

You can’t introduce a appraiser for the bank to use. The appraisal needs to be ordered by the bank with the bank as the intended user of the report. There are rare cases a bank may accept an appraisal from another lender for the subject property. But it’s usually an exception in their credit policy and not recommend. 

I like the contrarian investment strategy. However, I would really look at how long it could take to lease up, absorption rates, office demand with WFH still going strong, etc. I would also look at conversion to medical office space as a possible option. This sub sector has been performing somewhat well during these times. These turn around deals usually take deep pockets and a strong stomach. I work for a local lender and we have financed similar deals. We would usually require you to master lease or set up adequate reserves until leases are signed. 

The second deal looks promising. I'd reach out to some retail leasing brokers and ask about the viability of landing a NNN tenant for that space. They usually have their own requirements, traffic counts, income demographics, etc...

I work for a local lender and a ton of deals are getting killed once the appraisal or banks underwriter gets to them. We see borrowers projections and it's beyond rosy. Applying a 3% vacancy/credit loss rate to a retail strip, where the market data indicates 6-8% vacancy for the past ten years and the property has historically had significant turnover. Assuming 3% rent growth is fine if it coincides with market demand in that area. Some of these markets have declining populations for the past few decades. With no support that this trend would turn around? I agree with one of the above posters. It does appear to be new entrants into the syndication business pushing these deals onto retail investors who look at the Projected IRR and that's the extent of their due diligence.

With all that being said. I would always fall on the side of being more conservative myself. Yes, you will most likely pass on a ton of deals. But the ones that can pencil out will not disappoint.