Office Building Analysis

4 Replies

An investor has a building that I'm trying to evaluate, but can't determine which method to go by. Here are the numbers;

Actual Gross Inc $69,600.00
Actual Expenses $(16,224.00)
Vacancy (10%) $(6,960.00)
NOI $46,416.00
Value @ 8% Cap $580,200.00

The way she got this income is because she leased out each individual office suite to individual tenants. This office building is set up like a regular, 2 story house with 4 bedrooms and 2 baths so everyone is sharing common areas.

The part where I am unsure of is if you take this same property a mile away (multiple comps actually), it's leased to just 1 tenant and @ only about an NOI of $27,000 per year, which at an 8% cap will put this property at about $337,500.

I personally would only evaluate it at the 337k number just because I'm conservative, but I just wanted to see what some other investors think. I would only give it a value of that because if all 4 tenants left, the normal "market" would only allow the lower number. Again, just a thought and looking for others opinions - thanks!!

Is this an actual office building that started out as that use or an actual home that was converted and the use changed at some point??

Make sure you are not comparing office space and warehouse/industrial space.

You also have to compare similar age of buildings,amenities,and sizes.

1 mile is very far away for a comp.

The seller always wants to overvalue.I wouldn't go that high on it.In Atlanta office has a very high vacancy and turnover rate is high.

I would be more concerned if this income is based on established businesses that have been there for years and are on solid financial footing. If most of these businesses just moved in there you do not have stable pay history and track record of the business.In that situation I couldn't count the income as it's to fresh to be valid at least for me.

So the lease terms and history is just as important as the lease amount.If the leases are coming up for renewal I would make sure and lock in those leases at current rate or higher before purchasing.The current tenants might plan to leave to a newer facility for the same rent or want a concession from you to stay and POOF there goes your whole income evaluation.Now your 8 cap turned into a 5 for a C product !

Joel,

This is an actual office building located downtown next to more offices.

I agree, I am only comparing with other offices similar in age, etc.

As always, thanks for your advice Joel. Seems like you are hitting home that the lease track record is what should be looked at here, in addition to the amounts. I'll go ahead and check for the quality of tenants and go from there. Thanks again!

I think the previous writer was overgeneralizing a bit. You can't just say 1 mile is far for a comp. It may be. It may not be. Depends on the area. But since you are downtown next to other office buildings, he is probably right in this case. And as for new tenants - you should count that fully as income if the building should stabilize at that income level. Every property is different. Study the property and the market and ask an appraiser for data and help. This might help too - free cap rate calculator.
at www.caprates.net

@Tony Nguyen I think that you are right to be concerned about the huge revenue swing among comps. The basic question is: What is so special about this structure as compared to the others, that makes it possible to rent it in a way that it is? Did the current owner just get lucky – you may not. If you want to pursue this, I would cap it out at comparable's NOI. In this way, if you can in fact maintain the current revenue structure, you will have made a steel…