Commercial Property Seller - All new to me
Real Estate Investor · Raleigh, NC · Member since 2014 · 63 posts · 38 votes
So today was exciting, I spoke with my first seller who sounded motivated :). I was driving for dollars and found a home with yard work needed. Called the owner and had a good convo. I made an offer on the house which he was not really thrilled about but he didn't say no.
He also mentioned he owns a small office building and is more inclined to sell that. (says "I'm not doing anything with it"). I'm not sure how to value commercial real estate and would like some help.
It would be awesome if an investor in the area would like to partner with me on this potential deal?
Location near: 1100 Dresser Ct, Raleigh, NC 27609
1,200 sf
built 1980
Tax assessment: $130,000k
building class B (I think)
was last leased for $850 included most not all of the space (~900 sf)
Whats a good starting offer?
I'm about to start researching now....but what are some obvious things to consider? Does the owner pay utils for office building? if so I would need to be well below the 1% rule.
Keywords: Durham, Raleigh, Chapel hill
Hi @Jonathan Carter -
I earn my W2 income as a commercial Property Manager and have over 700k sq. ft. in my portfolio (325k Class A Office / 400k Flex/Industrial). The first thing I will tell you about commercial tenants is... "refer to the lease." There are basically 3 types of leases: Percentage Lease, Triple Net Lease, Full Service Lease. A good lease will go into detail and outline who pays for what. I would assume a building of this size would be some variation of a Net Lease.
| Type of Lease | Rent Basis | Often Used In |
| Percentage Lease | Base Rent + Percent of Monthly Sales | Retail Businesses; Malls |
| Net Lease | In additional to rent, tenant pays some or all of taxes, insurance, or maintenance. | Any commercial lease; usually favors landlord’s interests. |
| Double Net Lease | Tenant pays rent + taxes and insurance. | Any commercial lease; usually favors landlord’s interests. |
| Triple Net Lease | Tenant pays rent + taxes, insurance and maintenance. | Any commercial lease; usually favors landlord’s interests. |
| Full-Service Lease (aka Gross Lease) | Landlord directly pays all or most usual costs. These costs are often passed on to tenant in rent as a “CAM” charge. | Office, Some industrial and retail |
As for who pays for utilities, multiple factors would need to be considered: lease type, # of tenants, meter setup etc. If the property is occupied by one tenant, one would assume the utilities would be in the tenant's name. If the property has a single meter, but multiple tenants, the utilities would probably be put in the owner's name and billed back to the tenants.
In regards to valuing commercial, you are correct it is unlike residential valuations. Commercial properties are primarily valued using the Capitalization Rate. The Cap Rate is based on the income that the property is expected to generate and is used to estimate an investor's potential return on the investment.
Your scenario is tricky as when properties are vacant, or where the leases are set to expire in the upcoming year you are often forced to make some assumptions.
This just a quick & dirty of commercial properties as it relates to your original post. There are lots of things to consider beyond what was asked in your original post.
If you want to chat more, feel free to PM me.
-Eric
before u go and do anything commercial , go and join a Commercial investment meetup group and learn more . join one that does NOT SELL you stuff . learn from them first . hope you dont mind me saying that .
Hope this helps. If not, sorry .I tried . All the best.
Hi @Jonathan Carter -
I earn my W2 income as a commercial Property Manager and have over 700k sq. ft. in my portfolio (325k Class A Office / 400k Flex/Industrial). The first thing I will tell you about commercial tenants is... "refer to the lease." There are basically 3 types of leases: Percentage Lease, Triple Net Lease, Full Service Lease. A good lease will go into detail and outline who pays for what. I would assume a building of this size would be some variation of a Net Lease.
| Type of Lease | Rent Basis | Often Used In |
| Percentage Lease | Base Rent + Percent of Monthly Sales | Retail Businesses; Malls |
| Net Lease | In additional to rent, tenant pays some or all of taxes, insurance, or maintenance. | Any commercial lease; usually favors landlord’s interests. |
| Double Net Lease | Tenant pays rent + taxes and insurance. | Any commercial lease; usually favors landlord’s interests. |
| Triple Net Lease | Tenant pays rent + taxes, insurance and maintenance. | Any commercial lease; usually favors landlord’s interests. |
| Full-Service Lease (aka Gross Lease) | Landlord directly pays all or most usual costs. These costs are often passed on to tenant in rent as a “CAM” charge. | Office, Some industrial and retail |
As for who pays for utilities, multiple factors would need to be considered: lease type, # of tenants, meter setup etc. If the property is occupied by one tenant, one would assume the utilities would be in the tenant's name. If the property has a single meter, but multiple tenants, the utilities would probably be put in the owner's name and billed back to the tenants.
In regards to valuing commercial, you are correct it is unlike residential valuations. Commercial properties are primarily valued using the Capitalization Rate. The Cap Rate is based on the income that the property is expected to generate and is used to estimate an investor's potential return on the investment.
Your scenario is tricky as when properties are vacant, or where the leases are set to expire in the upcoming year you are often forced to make some assumptions.
This just a quick & dirty of commercial properties as it relates to your original post. There are lots of things to consider beyond what was asked in your original post.
If you want to chat more, feel free to PM me.
-Eric
Thank you @Eric Weireter for all the details in your post, that helps a lot. I do now remember reading about using Cap Rates for commercial real estate.
BP what is a good Cap Rate for this area?
The higher the Cap Rate the better. In the Triangle region, (in this market) the range of Cap Rates are typically between 6-8%.
The building you IDed was on loopnet. It sold a few weeks ago. I'm guessing that you meant the office building a couple buildings down (to the right as you face 1100).
@Eric Weireter has answered what you need to start. If "I'm not doing anything with it" means empty, the equation changes. You'll need to find out what office leases go for up there. Good location though. Good luck.
I've researched and spoke with a realtor about commercial space, and how they can sit for years. So I'm thinking to ask him for a lease option deal. That way If I dont find a long term tenant I can walk away. He said he could have it leased "in weeks" so I'll also give him the option to get a long term lease in place before I purchase.
He is older and he says he manages all his properties so I could see him just not putting in the effort to find a tenant. He also says he has stuff to move out the space. So I could provide value by helping him get it ready to lease. In exchange for a good deal.
Any other ideas or thoughts are appreciated.
@Jonathan Carter If he could easily lease it I doubt he would just be letting it set. If I were you I would find a similar vacant office property in the area and call up the listing broker and ask them questions like 'whats the vacancy rate for smaller b class office properties?' In my area the office market is really soft right now.
Yea, I'm was planning on letting him know that I need a really low lease payment may be enough to cover tax and utils while I look for a long term tenant. I would think he would be ok with that considering he's not getting any income right now for the property.
I tried to get some info from 2 Realtors with a property on the same street, but they "did feel comfortable giving advice on a property they weren't listing". I try to be more general and ask what do they think about smaller b class offices in the area. Thanks for the tip.