LLC Valuation for Owner-Occupied Commercial Building

2 Replies

Hello,

I am in a group of physicians buying a building that our practice will be renting out. The practice is the guarantor on the loan with no personal guarantees. The building is being purchased in an LLC.

When physicians leave the group/retire, I need a process in the operating agreement to buy them out. If they are not partners in the practice, they have no liability any longer on the loan. Is the most fair way to buy out leaving members through a formal appraisal? Or some formula based on NOI and book value for the property? I'd love to hear some examples of how others have done this.

I usually make a few steps 1. by agreement of the members (majority, 75% or all) and former partner 2. if no agreement then hire an appraiser mutually agreed upon to establish value 3. if no agreement then hire two appraisers to reach agreement or take average of their #s.  4. no agreement- the appraisers hire a 3rd appraiser whose valuation is final.  require the appraisers to be certified with x years of experience. FYI--the income approach to value is the primary method of valuing commercial property.  A relevant consideration when you have a property leased to another closely held entity. Might want to require appraisals to be based on market approach.  

@Brian R.

Your best bet would to be to consult with a lawyer/CPA and draft up an agreement according to your situation. Alternatively, another way investors use to is to keep the ownership of the building separate from the ownership in the physician group i.e. a doctor can retire from the physician group (be bought out, sell their stake, etc) yet have a separate ownership claim on the actual building. 

Echoing @John Akolt comment, commercial properties are valued on income. An mutually agreed appraiser can ascertain a value which will then be used to calculate each owner's share. You can make it as complicated as possible but the more sub-clauses you add, the more costs you will incur. At the start, to save time and hassle, you could seek to add a clause which states that that the majority of the members have to agree to an appraiser. This way you avoid the additional hassle of having a back and forth between appraisers and who gets to pick which appraiser. 

Hope this helps. Best of luck!

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