Tips on evaluating Commercial property

8 Replies

What kind of building is it??

Industrial, office, retail,etc.

Is the area urban, suburban, rural?

Are you paying all cash or trying finance with some down?

What is purchase price?

It is a 6 unit building on a very busy road here in Rhode Island. They are asking 500k for it. The building is fully occupied right now. Small retail shops and barber shop. It’s on a very busy road close to the airport. It also sits on big piece of land. I am meeting the owner today. What should my questions be?

Be sure to learn all you can about zoning, wetlands, FEMA/flood lines, and any other restrictions. Zoning in terms of use (what kind of businesses can you locate in the building?), zoning for parking (how many spaces would be required based on different types of uses?

Talk to city planning (Warwick?) about future plans for the area/site. 

Look in to building code issues too. Many properties in Warwick are not ADA accessible, which may or may not be an issue for different uses. What about fire alarm, sprinkler? Do they exist? Would you need them? 

What construction type is the building and what does that allow for uses? 

These are all "what can I do with the building" questions and also "what might be required if I change what the building's being used for" questions. 

Commercial real estate is valued based on net operating income divided by cap rate. He may not share the net operating income on the first meeting. If it gets to that point, you want to see three years of tax returns and then begin your own due diligence process. You will need to talk with a commercial broker to get an idea of the cap rate in your area. You will also want to know what typical vacancy rates are like in the area, the terms of the current leases, what capital expenditures he has done recently.

With that information you can build a pro forma to determine net operating income given different scenarios. You need to do some research to see if the current monthly leases are at or below market.

Once you are satisfied that you have a solid understanding of the financials make an offer at one or 2% above your local cap rate with all of the typical contingencies.

Hope it works out for you!

Thank you guys for all the great info! The owner had to reschedule the meeting today. I’ll be there Wednesday morning though. I’ll let you know how it goes! Thanks again!

To follow in the footsteps of what Bob said: NOI / Cap Rate = Value. You will get the NOI either through a PnL from the owner or the tax returns and bank statements of the owner if they are not organized. The cap rate is the toughest variable. The cap rate is dependent upon what other cap rates are going in the area along with class of the building. If average cap rates in an area are 6% for a Class A building then you may be able to put value closer to 6.5% even 7% depending on the local market (I would try to make some local broker friends) if it is a Class C. I would also head to the BOMA site if your want to know what makes the definition of each type of building class. Also, if you are paying cash or have strong lending capabilities to get the deal done fast that can help with the offer as well.

How did the meeting go? I'm curious how you buy a building without knowing how to value it !!! 

My best advice: Partner with someone who has been through this process  ... you could get burned very quickly.

Best of luck !!!