off market office building - Analysis

6 Replies

I recently came across an off market office building in Cleveland. The person who brought it over to me says it is a good deal. The problem though is I haven't dealt with an office building before. I have experience investing in SFR rentals and flips but not on the commercial side.

I am going to ask my PM (who takes care of my SFR) to check this out. I would appreciate any inputs/insights/caution/pitfalls to avoid from the experienced folks over here so I can go through my due-diligence process with some knowledge.....

Obviously the numbers look great but I want to make sure I am seeing the whole picture.

Income - 77k/year

Utilities ~18k

Maint & repair - ~7k

insurance ~1.8k

cleaning ~1.5k

garbage ~1.4k

taxes 11.5k

permits - 1k

NOI = ~34k

I guess I can ask for 250-300k.

Where is it at?

No way to tell if you have a deal or a dud without more information about the location.

Two big things to look into is the the leases and deferred maintenance.

1) The leases and the strength of the tenants are important to look at.

2) How long do you plan on keeping & have a exit plan.

3) Location of property is always a important part too.  Is it a well established area. Are property values going up or going down in the area.

4) Make sure there are no building violations or other things that could fall on the new owner if you were to buy it.

Good Luck.

Originally posted by @James Wise :

Where is it at?

No way to tell if you have a deal or a dud without more information about the location.

It is in Maple Heights

Originally posted by @Gerard DuMelle :

Two big things to look into is the the leases and deferred maintenance.

1) The leases and the strength of the tenants are important to look at.

2) How long do you plan on keeping & have a exit plan.

3) Location of property is always a important part too.  Is it a well established area. Are property values going up or going down in the area.

4) Make sure there are no building violations or other things that could fall on the new owner if you were to buy it.

Good Luck.

 Thanks for the points Gerard

1) Yes I will be asking them for leases. How do I determine the strength of the tenants though? I dont expect to see any big public companies here

2) I want to keep this long-term. Buy and hold. I am going to look for any value-add opportunities and if it did will refinance and try to take some cash out in the next few years

3) Isnt the commercial property value driven by NOI. OR Are you referring to the trend of property values of the nearby SFRs as a proxy?

4) OK

@Magesh R. - From the numbers you presented, I would guess that the property is less then 10K sq ft and has a number of local service providers (e.g. Lawyer, Insurance, RE Agent, etc.) that basically need little more then an office with a reception area. A few suggestion;

- Deferred maintenance: How much life is left in the roof, heating, etc; just like any other RE

- How has leasing been structured: Y-to-Y, 3 Y terms, Escalations, Recoveries, Options, etc

- For the 'strength' of the tenants, if they are smaller tenants as I suspect, look at how long they have been at the property. What was their original moving date. If it is a medical practice (e.g. Dental) how near retirement is the owner. Someone that has been in place for 10 years is not going to move that quickly unless there is a change in their business.

- What alternatives do tenants have if they want to move, what vacancy do similar quality properties have and how do their rents compare to what is being paid by current tenants.

Commercial is similar but different to other RE. At the end of the day, you have to know your Market.

Good luck

you should look at sales comps in the area and see what market cap rates are in your area. Then cap your noi to get the quick and dirty value, then see how that comps out on a psf basis as a sanity check. 

You should definitely understand how many tenants there are, remaining lease term, extension options and expense reimbursement methods/caps. Include at lease a 5% general vacancy loss off the top too. 

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