Commercial Property Valuation

First of all. Currently I have 30 points as a Commercial post contributor. How many points do I need to get a Free BP ball cap?

I was asked in a PM how to value a specific Commercial/Industrial property I identified on LoopNet. Wanted to share. This is a general discussion and does not cover 50 or more pages of potential insights.

Commercial/Industrial- Bare ground, 1,000,000 square foot warehouse, medical plaza, Bowling alley, Old elementary school building, etc. The value in these properties is more "Purpose" driven than market driven. Plus, there are fewer buyers who need that location, size, door/ceiling height, zoning, road access, etc. SFH 3/2 is more market driven, since you have more buyers and functionally it will be a SFH 3/2.

Work your financials up and decide on your financial targets. Our deals have to have a payoff of 8 to 12 years. We might do 13 or 14 years if there is a quick value add we can do.

Work backwards into the price you're willing to offer. Just for what they are providing. Don't pay them for added revenue streams or value add that you will do.

A. Run your income figures for what they have on the table. Assume 90% occupancy or run rate. Say $300,000

B. Expense: Then build annual costs. Insurance, Property tax, electric, water, maintenance, etc. Do estimate interest expense and Income taxes. Adjust for depreciation. Say $200,000

C. So Net income of $100,000.

D. Add back in depreciation which is not CASH. Say $20,000. Not going in depth about Cost segregation and many other things. Keeping it simple.

E. Cash flow = $120,000 Income taxes also.

Now back into what you are willing to pay for the way the property exists today.

1. Let's say $600,000. If cash flowing $120,000 then that is a 5-year payback. Ok by me.

2. Let's say $1,200,000. Then with $120,000 cash flow, that is a 10-year payback. Still okay with me.

3. Let's say $1,600,000. With $120,000 cash flow, then 13.3 payback. I don't like this.

F. But let's say you can put a billboard in at no cost to you. The billboard company puts it in and gives your $10,000 per year. So now your cash flow is $130,000; then 12.3 years. Sounds good to me.

G. Let's say you're going to split the building up and make an additional $50,000 per year above your base rental rate.

H. Let's say the parking lot is paved and you're going to rent it out for an additional $40,000 per year. You just have to put parking signs, gate and rental software in. Then you do the deal.

Deduct any Capex items you will need to repair. Say $20,000 new fence.

I. Now back into what you are willing to pay for the way the property exists today.

J. Make the offer and walk away. If they are offering for less than, obviously buy it. Just offer a little less.

But let's say you're willing to pay $1,300,000; but they have listed for $2,200,000. You make your offer and walk away. Keep doing this. Someone will bite.

Key, develop a Purpose or Value you bring to the table. Never buy a Commercial/Industrial property as a Hold investment. Although both might make money you will make more money having a pre-defined purpose.

Buying Strategy:

A. If you're in a Target rich environment, make a list of 10 properties you're interested in.

B. List their asking price and your offer price.

C. Put them in descending order and have your Realtor start making offers.

D. Offer- 3 day offer, subject to 1 week inspection and 30 day due diligence. 15 day close period. Put say $5,000 or $10,000 earnest money to be applied to the purchase, subject to your due diligence. This shows them you are a real buyer. Locks the deal down while you are doing your due diligence.

E. Go make another offer on another property at the same time. All with the Subject to's.

F. You don't know what the Business and Life situation of the seller is. You want to keep making offers till someone bites. Whether they are retiring, dead, broke, divorced, moving, etc.; you're looking for someone that wants to sale. Although you might do different Purposes or businesses at each of the different deals, you're looking for which one will make you the most profit.

Deal Making:

A. Your offers are absurd. Asking $2mm, offer $1,450,000, example.

B. Let's say they want their $2mm. Come back with some or all of the following. Can't pay you the $2mm, but I can do $1.8mm.

1. Of the $1.8mm I want $300,000 as a noncompete agreement. (Since this has a tax life of 15 years or less, you can do Cost seg and write it off.)

2. Do asset purchase only and not business. Less due diligence.

3. They still want $2mm, offer $1.8mm. Say you want the assets listed separately in the purchase agreement. Building $800,000. Equipment $300,000. Fence/Landscaping $100,000. HVAC Lights $100,000. Roads and Parking $200,000. Etc Etc. Why? The building $800,000 is what gets reported to the City/County for Property tax value. Decreases the chance of increased property taxes. The rest of the costs since they are Tax lives of 15 or less, can be Cost Seg and written off. You might still pay for a Cost Seg, but this adds credence for any IRS challenges.

4. They still want the $2mm. Settle on $1.9mm say. Do all of the above, plus ask them for $500,000 seller finance, for 5 years, with $0 interest. They will need to take a second position behind the bank. Be careful, if you refi, or use for collateral, you may need to pay them off.

5. Part of 3, maybe 1099 them and pay a consulting fee of $100,000 per year for 5 years.

Examples:

A. Old school buildings. Repurpose to MFH. Contact your school systems and ask. Our excavator contractor has two of these and doing great. Hardest issue is utilities to each room.

B. Texas property tax sales or auctions. Recommend Land only- you take possession in a few months. Houses- it takes 2 years.

3 acres with $25,000 taxes due, off auction list. Offer them $3,000. Problem, has High tension Powerlines over it. You can't build there. Put RV/Boat storage and cargo container storage there. Then Sale.

10 acres on auction. $5,000 back taxes. Hopefully buy for $20,000. Problem, area drainage goes straight down the middle of the property. Put in drainage ditch. Subdivide and sale for $80,000 per lot. Going price for that area. 2 miles to Interstate.

C. Buy farm ground 75 acres for $9,000 per acre. Put in $200,000 of roads, dams, entrances. Sale 25 lots for $100,000 each.

D. Loopnet Baltimore, 4070 North Point. Example used in above discussion.

E. 20 acre old car parking lot next to Airport. $800,000. Offer less. Make RV/Boat/Semi parking. Concrete/Asphalt is old, but great for parking. Rent out part for Firework stand for a month, for $25,000. Put in Billboard for revenue of $10,000 per year. Owned by one of my banks for 10 years, just sitting there.

F. All about looking for Nasty properties and old listings. Use your imagination and develop a purpose for it.

G. How about existing Medical Plazas, Office Buildings, etc. These are probably good, but I like value add and distressed properties for returns.

Start small and Make Your Big Mistakes Early.

How do I get a BP ball cap for free?