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Opinion of this property

Discussion in 'Other Off Topic Forum' started by Jason W, Jan 3, 2004.

  1. Jason W

    Jason W Formula Junior
    Silver Subscribed

    Oct 31, 2003
    791
    Singapore
    Full Name:
    Jason W
    Current Use: Office Building

    Gross Building Area: 20,205 SF
    Land Size/Sq.Ft.: 33,250 SF (0.7633 Acres)
    Number of Buildings: 1 Two-Story Office Building
    Lad to Building Ratio: 1.65
    Construction Type: Stucco and Glass Exterior, Concrete Slab, Concrete and Metal Structure
    Year of Construction: 1984
    Current Occupancy: 100%

    Projected Income Summary

    Projected Average Monthly Gross Income: $17,000.00
    Reimbursement Income (NNN Leases etc.): $0.00
    Total Rent: $17,000.00
    Monthly Expenses: -$8,420.00
    Net Income before debt service: $8,580.00

    Sale price of: $1,300,000.00
    Renovation/Update Cost of: $0.00
    Total Investment of: $1,300,000.00
    Loan Amount, Based on 80% Loan: $1,040,000.00
    Loan Repayment: 5%; 30 yrs -$5,582.94

    Net income after debt service: $2,997.06

    Projections:

    Projected Total Gross Income: $204,000.00
    Projected Expenses: -$101,040.00
    Net Income before debt service: $102,960.00
    Annual Projected Income After Debt Service: $35,964.66
    Return On Investment: 7.92%
    Cash on Cash: 13.83%

    Projected Income 2003

    Rental Income: $204,000.00
    Reimbursement Income: $0.00
    Gross Income: $204,000.00

    Projected Expenses

    Taxes ($25,200.00)
    Insurance ($6,000.00)
    Water ($2,280.00)
    Electricity ($36,000.00)
    Maintenance ($19,200.00)
    Telephone ($840.00)
    Gas ($3,420.00)
    Supplies ($3,600.00)
    Trash ($1,200.00)
    Elevator Maintenance ($3,300.00)

    Total Expenses ($101,040.00)

    Net Operating Income $102,960.00

    Notes: (1)The property is occupied by a single tenant, the State of [edit], Department of Criminal Justice. They have occupied the building since 1989. Their leases have been 5 years long and they have consistently renewed their 5 year options thus far. The current lease term expires August 2004.
     
  2. davem

    davem F1 Veteran
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    Jan 21, 2002
    5,140
    Stepford, Connecticut
    Full Name:
    dave m
    Jason.
    I would first have the tenant sign a new lease so you have a stable rent coming in beyond the few months left.
    Next for any commercial property you will probably get no more than a 20 yr. note. I just did a smaller deal than this and the best rate at the time was 5.50% I believe its higher now. Last if this is your first commercial property dont be surprised if the bank wants 30% down instead.
     
  3. JSL

    JSL Formula 3

    Jan 5, 2002
    2,212
    California
    Full Name:
    J.S. Leonard
    Jason: Sounds like a reasonable deal. If it were near me, I would be interested myself. Make a lease renewal a condition of any offer. If you can swing it, try to accelerate the loan. You would probably be better off if you could make a more substantial down payment. If it is cash flow you are looking at that may make sense. I usually don't factor any appreciation into my commercial investments. Cash flow should be the only consideration. I have found that folks who speculate with high debt to equity ratios, counting on appeciation, often end up with nothing. Sounds like the lease is full service. What is your expectation of utilities? Major increases in power costs will directly impact your cash flow. Any chance of converting the tenant to a NN lease? I am always a little cautious about energy costs living here in California. Get your questions answered and the lease renegotiated and go for it. Sounds like a pretty good investment on the surface.
     
  4. GuardsRed

    GuardsRed Karting

    Nov 4, 2003
    129
    Alexandria, VA
    Full Name:
    Sam
    I agree with the statement that the bank will want more than 20% down especially if this is your first property. If you negotiate a loan with the same lender and the property has been performing well, you may end up between 20-25% down.

    Everything else seem reasonable. I would, as suggested make a contingent offer. The State must accept a new lease or no deal. In the interirm of the new lease, you will want to develop at least three new approaches for the property, determining what is the highest best use in priority. This is in case the State does not renew in 2009. You don't want to be caught with your pants down.

    Check zoning for the area...it may give you ideas how to use the building post State occupancy.

    Have an exit plan. Are you holding for long term? Or is this a moderate flip (4-5 years and bail)? Appreciation rates for this type of property will answer that question along with a peek at the communities master plan to see what is coming down the road. Addition of nice linkages may preclude a flip.
     
  5. Jason W

    Jason W Formula Junior
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    Oct 31, 2003
    791
    Singapore
    Full Name:
    Jason W
    Guys,

    Thanks for the input.

    This would be a long term hold between 3-4 investors.
     
  6. JimSchad

    JimSchad Guest

    Who is going to manage the property and for what fee?

    What about taxes on the income generated?

    Don't forget to figure in closing costs.

    Annual Legal Fees.
     
  7. Texas Forever

    Texas Forever Three Time F1 World Champ
    Rossa Subscribed

    Apr 28, 2003
    38,914
    Texas!
    Jason, sorry I didn't repond earlier. I just recently saw this post. What follows is my dirt lecture 101. If this is too basic, my apologies in advance. HW, commerial real estate is fundamentally a very simple bidness.

    The first thing you need to understand is cap rates because you price real estate according to cap rates. The formula is very simple:

    Net Operating Income (NOI) / a percentage = sales price.

    In your deal, NOI is $102,960. Because the sales price is $1,300,000, working backward, the percentage is 7.92%. This percentage is the cap rate, or capitalization rate.

    Once you determine that the NOI numbers are legit, the only wiggle room in the price negotiations is the cap rate. As a buyer, you want a higher cap rate. If you are the seller you want a lower cap rate.

    Why? The theory is that the cap rate adjusts for the risk inherent in a real estate deal versus, say, a bank CD. For example, right now I can get you 3% on a $1.3M bank CD without cancellation penalties. This yields you $39,000 a year, and you get to sleep like a baby.

    With this as a floor, how much risk are you will to take to earn almost 3 times the bank CD rate, e.g., $39,000 x 3 = $117,000, which is pretty close to your NOI number.

    Moreover, because almost all deals involve debt, this also affects the cap rate because, leverage, increases your risk and your potential reward. Thus, even though you can borrow at 5%, you still need to earn an even higher return to justify the increased risk.

    In practice, get out a calculator and confirm that dividing by a percentage is counter intuitive. That is, the higher the percentage in the denominator, the lower the result.

    There are also some subscription web sites that publish cap rates such as http://www.realtyrates.com/

    In your case, my biggest concern would be to figure out why the seller is selling. Single tenant buildings are light switches. They are either slot machines or black holes. Remember, unlike homes, nobody loves commerical real estate. It is very difficult to lease up an empty box.

    So, again, if this is such a good deal, why does the seller want out? Perhaps he knows something that you don't? There are good reasons to sell and bad ones. Your job as a buyer is to figure this out.

    Finally, in additiion to this basic point, make sure that you put together a good team of advisors such as an experienced broker and a real estate attorney.

    Good luck and let us know how it goes, DrTax
     
  8. JSL

    JSL Formula 3

    Jan 5, 2002
    2,212
    California
    Full Name:
    J.S. Leonard
    I usually say that the free advise you get is usually worth what you are paying. However, everything that has been written here so far is right on the mark. We are all pretty lucky to have a place to go and ask these type of questions and get solid information. Quite impressive!
     
  9. DallasGuy

    DallasGuy Formula Junior

    Oct 29, 2002
    606
    Frisco TX
    Full Name:
    Chris F
    For the life of me, I can't figure out where the 7.92% ROI is coming from in those projections. Am I just blind?

    The Cash on Cash of 13.83% is pretty simple but I am not finding where the ROI is being calculated from.
     

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