How to look at commercial property- I'm new here...

[Samuel DeMass]

Hey BP!

I found a commercial property with a seller who is ready to sell.  The seller took the property off the market.

I'm cautious about it, but don't want to let an opportunity go by without taking a good look at it.  I feel like it's an opportunity to learn how to analyze this type of deal.

Here's the details of the deal to help frame the questions:

-3 unit commercial property

-Two units occupied, one vacant.  The vacant unit was previously a BBQ shop/restaurant.

-The market is a rural town in the population range of 30 to 50 thousand.

-Location is in the older, but still utilized part of town.

-Owner pays sewer

-Tenants pay other utilities (each metered)

-Asking price (negotiable): 130K

-Current Rent unit A - $250/mo

-Current Rent unit B - $500/mo

-(Historical) Rent unit C - $800/mo 

Theoretical/"historical" rent total: 1550/mo

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My concern is with the $800 dollar gorilla in the room, or out of the room as it were and what value to assign to vacancy rates.

1.)  How do you analyze a commercial property based on a vacant tenant position?

2.)  How do you dig into the market to know what that particular unit will demand in rent?

3.)  What are some good follow up questions to help establish the value of the property?

4.)  What else should I be looking at?

Thank you for your time.

-Sam

[Christopher Sandoval]

Hi Samuel                   

We just had a seminar that was very similar to this discussion. Here are some of the answers that we came up with:

1.)  Get rental numbers in the area and then discount for the existing vacancy by increasing the first year vacancy rate.

2.) Call property management companies in the area and commercial brokers who specialize in this type of commercial property.

3.) How long has unit c been empty? What is the demand for this unit? What is the condition of the property?What do the other two leases look like?

4.) How strong is the economy? Is there one or two main employers that can potentially shut the town down? What is the zoining?

Hope this helps!