Marion, IN · Member since 2019 · 20 posts · 14 votes
I've heard that the best way to price commercial real estate is with NOI and cap rate - but what if the property is only 40% occupied? Certainly I can't offer 40% of asking, but how low is too low? How high is too high?
Thanks for your tips advice and wisdom on this one.
Specialist · NY · Member since 2016 · 82 posts · 60 votes
5y
If the property is only 40% occupied. I’d would deduct the lease-up costs off the asking price and that would be my offer, with maybe an extra 5-10% penciled in for risk.
So for example I’m going to make some assumptions about the building for simplicity sake.
10,000 square foot building. market rent for the vacant space $10/SF. Asking price $1MM. 6,000/SF vacant. Market leasing assumptions: $5/sf for tenant improvements, 2 month free rent/ concessions, 4 months absorption (time it takes to lease-up), brokers commission 25% (7,7,7,3,3).
$1,000,000 - market value
(-$30,000- TIs)
(-$10,000- free rent)
(-$20,000- rent loss during absorption)
(-$15,000- brokers commission)
(-10,000 - entrepreneurial incentive -optional )
(-$85,000 - total lease-up costs)
$915,000- Offer price
If you’re financing the property, just ask the lender if they’re going to require you to set up a reserve account until the property is leased.
Investor · N.E. Illinois · Member since 2019 · 49 posts · 39 votes
5y
That's really going to depend on how long you think it will take you to get it leased up, how confident you are in doing so, what rate of return you are after, and your patience level on getting there.
Your offer price should be based on what you feel the value needs to be to hit your desired return or cash flow. If it's a "low ball", don't worry about it. It is what it is. And if they tell you to get lost, just move on to the next opportunity. The value of commercial real estate is primarily determined by what the tenants are willing to pay. It's 40% vacant for a reason, and the seller has to come to grips with that.
That's really going to depend on how long you think it will take you to get it leased up, how confident you are in doing so, what rate of return you are after, and your patience level on getting there.
Your offer price should be based on what you feel the value needs to be to hit your desired return or cash flow. If it's a "low ball", don't worry about it. It is what it is. And if they tell you to get lost, just move on to the next opportunity. The value of commercial real estate is primarily determined by what the tenants are willing to pay. It's 40% vacant for a reason, and the seller has to come to grips with that.
Thanks! This is a distressed property. 3 building, 10 units w/ about 10k rehab per unit and 20k on the facility (including code violations). One unit on the tour had dog crap all over it and my buddy toured it 3 months ago and reported the same.
I offered a master lease agreement to cover costs and a little kicker for any fees and I'm waiting to hear back.
Specialist · NY · Member since 2016 · 82 posts · 60 votes
5y
If the property is only 40% occupied. I’d would deduct the lease-up costs off the asking price and that would be my offer, with maybe an extra 5-10% penciled in for risk.
So for example I’m going to make some assumptions about the building for simplicity sake.
10,000 square foot building. market rent for the vacant space $10/SF. Asking price $1MM. 6,000/SF vacant. Market leasing assumptions: $5/sf for tenant improvements, 2 month free rent/ concessions, 4 months absorption (time it takes to lease-up), brokers commission 25% (7,7,7,3,3).
$1,000,000 - market value
(-$30,000- TIs)
(-$10,000- free rent)
(-$20,000- rent loss during absorption)
(-$15,000- brokers commission)
(-10,000 - entrepreneurial incentive -optional )
(-$85,000 - total lease-up costs)
$915,000- Offer price
If you’re financing the property, just ask the lender if they’re going to require you to set up a reserve account until the property is leased.
If the property is only 40% occupied. I’d would deduct the lease-up costs off the asking price and that would be my offer, with maybe an extra 5-10% penciled in for risk.
So for example I’m going to make some assumptions about the building for simplicity sake.
10,000 square foot building. market rent for the vacant space $10/SF. Asking price $1MM. 6,000/SF vacant. Market leasing assumptions: $5/sf for tenant improvements, 2 month free rent/ concessions, 4 months absorption (time it takes to lease-up), brokers commission 25% (7,7,7,3,3).
$1,000,000 - market value
(-$30,000- TIs)
(-$10,000- free rent)
(-$20,000- rent loss during absorption)
(-$15,000- brokers commission)
(-10,000 - entrepreneurial incentive -optional )
(-$85,000 - total lease-up costs)
$915,000- Offer price
If you’re financing the property, just ask the lender if they’re going to require you to set up a reserve account until the property is leased.
Hope this helps! good luck !
This is really helpful! Thanks for the estimates and theory behind it. Very excellent! The property is really distressed so I went another route, but this will be so helpful in the future.
Real Estate Broker · Canby, OR · Member since 2012 · 127 posts · 37 votes
5y
Hey Matthew, I'd love to hear how this one works out for you! Kevin's advice is great. I'd definitely figure out what it'll be worth, "ARV" once you have it renovated and leased at market rates. Then just work backwards to make sure you have the necessary margins for the renovations, holding costs, leasing and of course your profit for the risk you're taking! Good luck!