All Forum Posts by: Bob Langworthy

@Brian Lepo, my building is different than yours (4 offices with 20 parking spaces), but similar principles apply.

1) The building is in a single member LLC in my wife's name. We intend to hold it long term and either 1031 into something else or pass it on to our kids. It's in her name to give a little distance between the real estate and my accounting practice which is one of the tenants. I have clients that hold real estate in their own name, SMLLC, S Corp, or partnership. You'll want to talk with an accountant and attorney regarding your particular situation.

2) I have a general liability policy with Met Life. 

3) I bought a vacant building which has its pros and cons. I got to renovate the offices so that they were all in great shape and could command rents near the top of the market. The biggest pitfall has been a reality of commercial real estate: my vacancies have last longer than I would have liked. I bought the building three years ago and it took one year to reach full occupancy. 

Hope this helps,

@Ryan Barr, I can't recommend a structure without more information. In my case, yes I own the property 100% and the SMLLC worked best for me. You'll want to talk to an accountant and attorney about pros and cons of SMLLC, S Corp, and partnership in your particular case.

Hope this helps,

Debt service!

@Andrew Holder, you may also decide that you like the cash flow and decide to hold it long term. As the value increases, you may consider refinancing it to pull out your original money and do another deal. A commercial BRRRR.

As others have said, you'll want to seek professional help. I'm an accountant that owns commercial real estate in a single member LLC separate from my accounting practice, but that was what worked best for my particular situation. I used an attorney to set it up.

A question for your attorney and accountant will be: is this better set up as one business or as two? 

Hope this helps,

@Andrew Holder, to value commercial real estate, you need to know the Net Operating Income of the property and the prevailing cap rate for your area. Much has been written on both of these, so I'll just summarize:

NOI: earnings before interest, depreciation, and amortization. Think of it as the amount of money the property would produce if there wasn't a mortgage.

Cap rate: the rate of return. You can talk to commercial realtors in your area to find out what cap rate they are seeing on properties. 

The value of the property is then calculated as NOI/cap rate. So if the building has NOI of $30,000 and the typical cap rate in your area is 6%, then the value would be $500,000. You can flip the equation around and say that if someone bought the building for $500k at a 6% cap rate, they would have $30k in NOI.

Now your question is slightly different: how to value a building that is 85% occupied. This is open to debate, but I would value the building based on full occupancy knowing that you won't get that. It gives you a starting point for negotiations with a lower cap rate (better for you). You will need to turn over all information on the building (tax returns, current lease terms, current lease amounts, etc.) so the other side will run their own numbers. You won't get your asking price, but you'll get more than if you price it based on 85% occupancy. 

Hope this helps,

@Andrew Holder, I own an office building in Maine that was vacant when I purchased it so I had no numbers to go by. I knew the basic concept that I wanted to offer to tenants, so I was able to find similar buildings with space for rent. That gave me an idea of what I could charge. I contacted an insurance agent to get figures on insurance and made educated guesses on utilities. I rounded all my figures up to be conservative.

After all was said and done, some of the figures were close and the others were close enough. 

For a lease, I had a copy of the one from where I used to lease office space and contacted an attorney friend for another copy to look at. I blended the two to serve my needs.

Hope this helps,

Your original post references the net income. Did you mean net operating income? There's a big difference between the two.

As others have said, you need to see detailed financials, rent roll, existing leases, and tax returns. You'll also want to know about all of the improvements that they have made. It probably goes without saying that what they paid for it is irrelevant. 

Have you considered approaching them about seller financing? Potential for more money in their pocket and less out of yours.

Hope this helps,

All real estate is local so the impact of online retail is going to vary widely. I have seen several large retail centers repurposed away from retail to: medical, event space, churches, condos. 

The bottom line: there will always be a need for four walls and a roof. The contents might change, but the structure will be needed.

The answer will vary by municipality. For instance, they may not be willing to officially change the zoning designation, but they may give you a variance for your specific use. Municipalities are sometimes concerned about setting a precedent and this is a way that some try to work around that.

Hope this helps,