Is this a good commercial deal

24 Replies

Class "A" Multi-Tenant Hi-Rise; 249,081 S.F.; built in 1987; 100% Leased as of January 2015; 5 tenants occupy 82% of the space; current NOI: $2.77M; 2015 NOI is estimated at $3,075,441; price $31,000,000; cap rate 9.92% based on 2015 NOI.

Originally posted by @De Juan Washington:

Class "A" Multi-Tenant Hi-Rise; 249,081 S.F.; built in 1987; 100% Leased as of January 2015; 5 tenants occupy 82% of the space; current NOI: $2.77M; 2015 NOI is estimated at $3,075,441; price $31,000,000; cap rate 9.92% based on 2015 NOI.

You would need current cap rate comps. If the current comps were 5% the value would be $55,400,000. If the comps were 12% the value would be $23,083,333. You would adjust the cap rate to use depending if leases were above or below market and how soon they were set to expire. 2015 guesstimated NOI is too far from away since and sale before could drastically affect what cap rate you would use.

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

Biggest thing is what is the market doing TODAY??

Some of those tenants could be paying pre-recession rents per sq ft.

Not only should you not go by the 2015 rent increases but realize that rents might actually fall from the current position upon lease up or renewal.

Many offices are consolidating space so my worry would be that one is planning on leaving soon or asking for less space and you have to reconfigure the tenants and building. Lot's of rehab costs and reduced rent makes a good deal go to bad. 

That's a pretty high tenant concentration with 5 tenants occupying approx. 82% of the space. Carefully examine your rollover risk and the following: 

- tenant quality. Publicly traded? If not, see if there are tenant financials for the larger tenants. 

-Find out how long the tenants have been at the property. If a tenant has had significant growth in business there is a possibility they are outgrowing their space and may need to move near lease maturity. 

- carefully examine the lease expense structure. Many office leases have base stop expenses that reset at renewal, therefore the reimbursements will be a lot less. 

- I hope you backed out a decent vacancy factor as well as capital reserves from your noi, which an appraiser would do. An office building at 100% occupancy is very rare. There is a possibility that rents might be below market, which if future upside for you. 

Good luck. 

Welcome to BiggerPockets, Victor. 

Originally posted by @Jon Klaus:

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

 OMG!  So you would say 555 California completed in 1969 wasn't a Class A building?   One Market in the 70's?  Transamerica Pyramid?  All class A buildings in SF built before 1987.

Originally posted by @Jon Klaus:

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

What market would that be a good NOI ? Definitely not SF or NYC. They would be well over $ 20-30 NOI per sf. This is around $11. I would think this is low for even top Texas markets.

Originally posted by @Bob Bowling:
Originally posted by @Jon Klaus:

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

 OMG!  So you would say 555 California completed in 1969 wasn't a Class A building?   One Market in the 70's?  Transamerica Pyramid?  All class A buildings in SF built before 1987.

 Bob I guess you don't know the meaning of usually. I don't think the OP was talking about any of the buildings you mentioned. 

@De Juan Washington   I would want to do a much deeper analysis on a building that expensive.  Reread @Joel Owens post.

What is happening in the local economy? Is demand increasing or decreasing. How about building permits. Is supply increasing or decreasing. 

The NOI is increasing by about 11%. Is that YOUR estimation or the sellers? Keep in mind even if rents increase so will expenses. 

Keep in mind that you must include vacancy as an expense even if there is 100% occupancy now. Any lender that would finance the property is going to subtract a vacancy rate when appraising the property. They will not value it as if 100% occupied even if it is. Any investor would be a fool to assume that 100% occupancy will continue. 

To answer your question on the surface it appears to be a decent  deal.

Originally posted by @Ned Carey:
Originally posted by @Bob Bowling:
Originally posted by @Jon Klaus:

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

 OMG!  So you would say 555 California completed in 1969 wasn't a Class A building?   One Market in the 70's?  Transamerica Pyramid?  All class A buildings in SF built before 1987.

 Bob I guess you don't know the meaning of usually. I don't think the OP was talking about any of the buildings you mentioned. 

 The part to me that was unusual was referring to a building that "lost" its Class A status based on age.  The buildings I mentioned are all class A and older than 1987.  They will likely stay class A properties for the next 50 years +.  In fact with all the SOMA new office construction since 2000 I can think of only a few that meet class A definition. 

Is it "usual" where you're from for a building to lose class A designation if it's over 27 years?

Originally posted by @Ned Carey:

To answer your question on the surface it appears to be a decent  deal.

 waitaminite waitaminite!!

We don't know the market location.

We don't know the market rents.

We don't know the markrt cap rate.

We don't know the leased fee value.

We don't know the market v/c.

We don't know the lease structure. 

BUT WE know it "appears" to be a decent deal on the surface???????..??

Sure, whatever.

Originally posted by @Jon Klaus:

Welcome to BiggerPockets, Victor. 

Thanks Jon 

"Is it "usual" where you're from for a building to lose class A designation if it's over 27 years?"

It happens all the time in my market if the location is not class A. 

A cap rate in the 8-10 range tells me it may not be a class A property in a class A location. 

Originally posted by @Bob Bowling:
Originally posted by @Jon Klaus:

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

What market would that be a good NOI ? Definitely not SF or NYC. They would be well over $ 20-30 NOI per sf. This is around $11. I would think this is low for even top Texas markets.

 8-10 cap rate would be good for most US markets and fantastic for NYC and SF.   Is $3mm net on $30mm cap bad in your market?

De Juan,

As a lender, it sounds like a good deal if it is truly Class A space.  Questions I have are:

Is the location Class A?  The rent per SF sounds low.

What is the market and sub-market vacancy rate?  I just ran a deal in Houston with 97% occ, but the area was at around 10% vacancy, so I estimated using that number.

Are you looking for financing or do you have to assume financing?

How tight are the current expenses?  Sellers sometimes do not include a management fee or reserves.  As a lender, I would include those numbers in determining if we could lend on the property.

Are the leases NNN or gross? On a NNN lease, it is easier to determine your true NOI.

Mark

Originally posted by @Jon Klaus:

"Is it "usual" where you're from for a building to lose class A designation if it's over 27 years?"

It happens all the time in my market if the location is not class A. 

Is this Texas?  Are you saying the CBD moved after the Class A building was built?  Can you give a couple of buildings as examples?

Originally posted by @Jon Klaus:
Originally posted by @Bob Bowling:
Originally posted by @Jon Klaus:

Is it truly class A? 27 year old building usually isn't class A anymore. How's the location? That's pretty good NOI if it really is class A. 8.7% current cap rate.

What market would that be a good NOI ? Definitely not SF or NYC. They would be well over $ 20-30 NOI per sf. This is around $11. I would think this is low for even top Texas markets.

 8-10 cap rate would be good for most US markets and fantastic for NYC and SF.   Is $3mm net on $30mm cap bad in your market?

 CBRE Cap Rate Survey for mid 2013 reports average Class A office in CBD locations cap rates of 5.7%.  If this is an average market you'd expect the building to sell for $52, 600, 000.  If the $31, 000, 000 is the actual sales price then this not a Class A building, in a very depressed market, all those big tenants have long term below market leases, or above market leases expiring shortly and the expectation to not renew. I can only imagine this to be a deal if the owner plans to occupy.   Of course we have NO idea what the actual market cap rate is in this market so any estimation of a "deal" is just a wild *** guess.

An 8-10% cap in SF's market today is not fantastic.  It would mean the sky is falling!

Originally posted by @Bob Bowling:
Originally posted by @Jon Klaus:

 8-10 cap rate would be good for most US markets and fantastic for NYC and SF.  

An 8-10% cap in SF's market today is not fantastic.  It would mean the sky is falling!

Bob, Jon did not say if someday cap rates reach 8-10 it would be fantastic. He said TODAY it would be fantastic. 

Originally posted by @Ned Carey:
Originally posted by @Bob Bowling:
Originally posted by @Jon Klaus:

 8-10 cap rate would be good for most US markets and fantastic for NYC and SF.  

An 8-10% cap in SF's market today is not fantastic.  It would mean the sky is falling!

Bob, Jon did not say if someday cap rates reach 8-10 it would be fantastic. He said TODAY it would be fantastic. 

Perhaps you don't understand "An 8-10% cap in SF's market today"  ??

If there were several sales of Class A CBD buildings TODAY it would mean the market was CRASHING!  Perhaps you don't understand the meaning of CRASHING?  Hint, it's not fantastic.

Updated almost 4 years ago

If there were several sales of Class A CBD buildings TODAY at 8-10% caps.

@Ned Carey  

I appreciate your participation/opinion but let's let @Jon Klaus  

answer for himself.  I'd prefer to hear your opinion/experience concerning age as it relates to Class A office properties that I asked you about in an earlier post.  My experience in SF, Honolulu, Cincinnati is that the CBD stays the same pretty much.  SF has expanded some but it's only been the last few years that the market has recognized an equalization between NOMA and SOMA but that's been mainly the result of MASSIVE office growth in SOMA. 

It is hard for me to imagine a CBD moving and investors building a Class A property out of that area.  In Texas with all the land I guess a city core could actually die and be built up in another location but I've only been in a Texas airport so I'm only guessing. 

I think it would be fascinating to see the history of a City moving so to speak and would like to hear anyone's experience of this.

I didn't mention CBD, which is likely to remain a class A area. In Dallas and Houston there are many buildings that are outside class A areas that were considered class A when built, but are B or less after a few decades.  If you want examples, just search for high rise 8 caps and you'll find them. I suspect the OP is looking at this type property. Maybe a B in a B area. 

Originally posted by @Jon Klaus:

I didn't mention CBD, which is likely to remain a class A area. In Dallas and Houston there are many buildings that are outside class A areas that were considered class A when built, but are B or less after a few decades.  If you want examples, just search for high rise 8 caps and you'll find them. I suspect the OP is looking at this type property. Maybe a B in a B area. 

I searched but all I get is truck caps.  LOL 

BOMA defines Class A,

Metropolitan Base Definitions

Class AMost prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.

 

These classes represent a subjective quality rating of buildings which indicates the competitive ability of each building to attract similar types of tenants. A combination of factors including rent, building finishes, system standards and efficiency, building amenities, location/accessibility and market perception are used as relative measures.

In SF there are buildings with Class A finishes and amenities but they were never considered Class A buildings because they could NEVER get Class A rents because of location.  Honolulu has only one downtown despite trying to create a second city, Kapolei, which failed so bad we are spending $5,000,000,000 + on rail to get the residents into the only downtown.  Were these just random speculative buildings or was there an effort to create a second CBD or just owner occupied prestige buildings to get the owners closer to their country club and NOT spending the big bucks rent in the CBD?

Bob and Jon,

I think you could see an A space building from the 70s and 80s become a B space for a couple of reasons.  

I am sure there were buildings built in the Detroit market that 30-40 years ago were A space, but time has passed that city buy.  I might put Cleveland, Toledo, Dayton, Akron, Youngstown in to that group.

I also think a cheap landlord could affect the building status if they refuse or cant afford to properly maintain their building.

Mark

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