How the heck do I value this property commercial property??
Firstly, I apologize for my absolute nonexistent knowledge on CRE.  I inherited a gas station on a hard corner that I leased out last year for a 5 year NNN, renewable for a second term. 

I plan on selling this property but have no clue on how to price it. I tried using the average cap rate of comps in the area which is about 5% and calculating a price using that and the rental income, essentially giving it a 20 year time frame to pay for itself, hence the 5 percent. 

But I feel like the price that this calculation produces is incredibly high , and the lots on the adjacent corners are priced considerably lower. 

The gas station itself is run down and in bad shape but good enough to operate.

I am at a loss.. any ideas as to how I might approach this?
[{"id": "ih7p5i4", "text": "Is the tenant local or a national chain? Is the tenancy similar to the comps? Buyers are going to pay more for a national chain than some local operator. Also, who\u2019s responsible for building maintenance? If it\u2019s run down and the roof/HVAC/etc needs to be replaced, the condition will certainly impact value.", "replies": [{"id": "ih7q508", "text": "Thanks for reply.. Local, he can be removed with ease if buyer is dedicated. \n\nThere are a few different types of buyers for this I believe. \n\n1. one that would be interested in removing lessee and operating it themselves. (store is highly profitable). \n2. one that would receive rental income. \n3. one that would tear down and either build a new station or something else. \n\nThe building is tiny and I replaced HVAC and roof prior to lease. The building is so small that I do not see maintenance having any effect.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ih7pdcg", "text": "That's because a 5 cap on a rundown gas station is insane.\n\nThe market for this type of asset is pretty limited. Not many investors want the environment risk so your best bet is an owner operator. First thing I'd do is ask you tenant if he wants to buy it.", "replies": [{"id": "ih7r4h0", "text": "Ive been trying to study up on cap rate and it does not make sense to me. Let us say for example I list the property for a very cheap price, correlating a higher cap rate. \n\nI read that a high Cap Rate is considered risky.. why then, if I am giving someone a good deal, does it seem like a risky investment just based on cap rate. \n\nSince these numbers are basically public, I do not see the problem with sharing them here, might help.. \n\nThe current rent is 9k monthly and the operator is offering somewhere in the range of 500-600k, I feel like I would have to be an idiot to take such an offer.", "replies": [{"id": "ih7s3rr", "text": "If $9k ($108,000 annually) is the net income, then yes, $600k is way under value. \n\nI don't know your market, but, if for example, a 7% cap rate makes sense, then a price closer to $1.5M would be reasonable.", "replies": [{"id": "ih7s7es", "text": "I thought so! thank you!", "replies": [{"id": "ih85c06", "text": "How long has the gas station been there?\n\nYou need to confirm it\u2019s clean or gas station is on hook for cleaning it up. \n\nHow big is the site? What are traffic counts? \n\nIf you can answer these questions I can tell you what it\u2019s worth", "replies": [{"id": "ih976z5", "text": "30 Years old, up to date with TCEQ (Texas Commission of environmental quality). They just did a thorough inspection and lessee also had  fiberglass tanks inspected with extensive tests. \n\n&amp;#x200B;\n\n2 MPD site, about half an acre.\n\n&amp;#x200B;\n\ntraffic count is 10k from one side \n\n5k from the other \n\n&amp;#x200B;\n\nThanks!", "replies": [{"id": "ih9axiu", "text": "Sell for $850k - $1mill and move on!", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ih7sh1j", "text": "9k triple net or 9k gross? \nSite size, number of pumps, size of interior, daily traffic count?\nDoes the operator have multiple locations or just this?", "replies": [{"id": "ih7t0ww", "text": "Just this, small local guy running with his family pretty much.. Excuse my ignorance but he is paying 9k a month and pays for everything except for property tax which is negligible, as the county values the property at around 150-200k.\n\nNot sure if that exactly fits into the category of NNN but the only thing I pay is a few thousand in property taxes.\n\nthanks for the reply btw.", "replies": [{"id": "ih7wqlo", "text": "Leases are a sliding scale with gross on one side (landlord pays everything) and absolute triple net on the other (tenant pays everything).\n\nWithout delving into why you're selling what are you going to do if he doesn't renew? Sounds like you have a pretty sweet stream of cash flow with (I'm assuming) no debt; otherwise, you would have a Lender\u2019s appraisal/valuation from some point to start from.", "replies": [{"id": "ih8q5uh", "text": "The store is highly profitable and the location is in high demand so in the off chance he does not want to renew, finding a new tenant is not a problem. \n\nNo debt, fortunately. Thanks for the insight!!", "replies": [{"id": "ih8re9k", "text": "You've said the store is highly profitable a couple times... do you have financials on the operations or just inferring that?", "replies": [{"id": "ih9797b", "text": "I personally operated it for a few years before leasing..", "replies": [{"id": "ih986bm", "text": "I also have current operators financials.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ih7wnri", "text": "A (relatively) high cap rate is an indicator that the buyer considers the income stream to be (relatively) risky. Say building x makes $100,000 NOI and sold for $1,000,000. Say building y makes $100,000 NOI but sold for $750,000. It is likely that building y is a riskier investment than building x.\n\nThat assumes that both building X and building Y sold in arms-length transactions at their market values. Building X will have a cap rate of 10% and building Y will have a cap rate of 13.33%. Thus a higher cap rate indicating a riskier investment.", "replies": [{"id": "ih8qlw6", "text": "Great explanation! thank you.. In this case, I assume cap rate is not always the best indicator of risk. \n\nFor example if a property owner wants to move a property quickly for personal reasons and prices it lower than market. \n\nThis would not necessarily mean a 'riskier\" investment.", "replies": [{"id": "ih9k35q", "text": "It depends. Cap rate is a pretty decent indicator of risk. The market it liquid enough that someone that wanted to move and a standard net lease asset quickly for personal reasons, they would only need to give up about 25-50 basis points (think sells for a 5.5% cap instead of a 5% cap). An asset like yours has a very limited buyer pool so a substantial price discount would be needed to motivate a quick sale.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ih8ckkx", "text": "Sell it for what you want, but understand that the market might not meet the your expectations.  Cap rates are a factor of many things and risk is part but not all of it.  If you have a credit tenant with corporate guarantee then maybe a 5% cap isn\u2019t crazy (it still probably crazy as interest rates have move significantly).  Older gas stations with inexperienced ownership provide a potential for environmental hazard that could be more expensive to clean up than the property is worth.  \n\nMy advice is to get a broker that specializes in retail and get their opinion.  They will know the buyers interested in this type of product and can give realistic guidance on pricing.  If you want to get a good rec I would reach out to the lawyer who drafted your last lease.  In the off chance you did not have an attorney draft that lease then I think your valuation will be closer to a 10% cap than a 5%.", "replies": [{"id": "ih8ps3h", "text": "Thank you, you seem knowledgeable on this topic.. I actually drafted the lease lmao.", "replies": [], "depth": 4}], "depth": 3}, {"id": "ih8fyjq", "text": "The risk comes from a single use building, if the tenant leaves your pool of incoming tenants is small without major tenant improvements and possible environment issues.", "replies": [{"id": "ih98dw4", "text": "Makes sense!", "replies": [], "depth": 4}], "depth": 3}, {"id": "ih8v15r", "text": "Look at it from the buyers perspective.\n\nIf your investment ***IS*** risky I am going to have a higher required return on my investment to own that asset. Higher the risk -&gt; higher the (required) return\n\nSo let's say you have a very safe asset, fully leased, long term tenants etc. Well I might be willing to buy it at a 4 cap because it is low risk. So for every dollar of income the asset produces I would be willing to pay more up front to buy it. It is dear. And dear things are expensive.\n\nOn the other hand if your asset is high risk, single tenant, no long term lease, large environmental risks etc. I would have a much higher required return to invest. So for every dollar of income the asset produces I will pay less dollars for it. It is not dear, and shite things are worth less.\n\nSo a 14% cap to a 5% cap tells you quantifiable things about the \"risk\" (leave me alone Dr. Bob) of the investment, and the amount of $s buyers are willing to pay for every single $ of income earned.", "replies": [{"id": "ih98cry", "text": "Great explanation. Thank you!", "replies": [], "depth": 4}], "depth": 3}, {"id": "ih98gra", "text": "There are nothing more subjective than cap rates", "replies": [], "depth": 3}, {"id": "ih9uocn", "text": "Why on earth would you sell for 600k? You are being robbed.", "replies": [{"id": "ih9vt2o", "text": "Was not planning on it, just an offer.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ihi192h", "text": "Where would you recommend finding industrial grade C warehouses to purchase?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ih7rgos", "text": "Do you have underground storage tanks? Are those tanks current in their payment of bonds? Any environmental that needs to be done? \n\nHow is the market? You can price it at land and see what it is. \n\nWhose gas are you selling and is there a longer term exclusive agreement on that? \n\nAny other features such as a car wash, recycling center ect on it for a noi approach? \n\nSee what comps are and I bet you will then be sad. Gas stations are an albatross for development", "replies": [{"id": "ih7s409", "text": "&gt;albatross\n\nThank you for the insight!", "replies": [], "depth": 2}, {"id": "ih9nd45", "text": "Also watch out.  Here the fuel suppliers typically own the tanks, pumps, canopies and signs so those site improvements may not even be owned by the building owner.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ih7rkuh", "text": "If you plan on selling it soon why don't you interview some agents? They'll give you a Brokers Opinion of Value. \n\nAlternatively, you can hire an appraiser to value it. The BPO won't be all that accurate but it will be cheaper (usually free) than an appraisal.", "replies": [{"id": "ih7sj87", "text": "True, there are just so many factors going into it I feel like they would not give accurate insight, Im probably wrong tho.. I will look into that! thanks for the insight(:", "replies": [{"id": "ih828qn", "text": "FYI if you do get it appaised this property type usually has 3 values. Real estate, equipment/fixtures, and a going concern intangible.", "replies": [], "depth": 3}, {"id": "ih8vdgf", "text": "This is literally what commercial brokers do, fyi. They will help you price it and if you want market it for sale.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ih7ws4x", "text": "Definitely consult with a commercial realtor. That\u2019s literally their job.", "replies": [{"id": "ih83iu9", "text": "Exactly. This is why people hire brokers\u2026.", "replies": [], "depth": 2}, {"id": "ih85t7s", "text": "Maybe I have just not found good ones, one found another gas station in another city that was completely incomparable and  said to price it accordingly and another told me to spend 100-150k to tear everything down, including tank removal and sell it for about 300k lot value. \n\nnetting about one years of rental income lol... gotta keep searching for a reputable realtor .. Im just in a small town so its a little difficult... literally like 1 comp. And anyone from out of town does not know anything about the area (its tremendously growing)", "replies": [{"id": "ih8jt0x", "text": "Don\u2019t hire anyone who calls themselves a realtor. \n\nDid you answer those other questions about the site? Acreage? Pumps? C store size? Walk in fridge?\n\nCity population and growth matters too.", "replies": [{"id": "ih8pf0e", "text": "ahh interesting okay.. so on the commercial side they are know as brokers as oppose to realtors? Or commercial real estate agents??", "replies": [{"id": "ih8xbl2", "text": "Brokers. \n\nResidential real estate agents may claim to do commercial but they are not brokers. You want a CRE broker and preferably one with experience with gas stations", "replies": [{"id": "ih98plh", "text": "thanks for the follow up, helpful!", "replies": [{"id": "ih98zqv", "text": "No problem, it isn't just a different fancy titlethough. It is a different profession with a different skill set and requisit experience and knowledge.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "ihab8y7", "text": "Also you\u2019re literally in the circle. Have you made other gas station owner buddies? Ask for referrals? Who sold them gas stations? Worth also reaching out to the attorney who dealt with the inheritance if they know of any cre brokers. They prob get an influx of clients with these type of assets. Lastly as a stretch you could look up owners prob via tax assessor or some county website and reach out to see if they themselves want to buy or know of experts to help you with transaction.", "replies": [{"id": "ihalevf", "text": "Good idea, Ive been thinking about making a sub reddit for gas/convenience store owners, to discuss such topics.. have not really found a good one.. Thanks!", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ih8vbmx", "text": "I sell NNN for a living which includes a lot of 7-11 and QuikTrips. You can PM if you want some color on the asset.", "replies": [{"id": "ih98qkt", "text": "Thank you!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ih8qiqh", "text": "Which state?", "replies": [{"id": "ih98r6o", "text": "TX", "replies": [{"id": "ih9950m", "text": "No broker involved?? They should be able to value it for you and give an explanation for its value", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ih8rpjd", "text": "Yes. You hire an experienced broker.", "replies": [], "depth": 1}, {"id": "ih8xync", "text": "At $100,000 a year NOI, you should probably be asking for a 6 or 7 cap ($1.4-1.6m plus) if you want to sell. $500,000 is too little. But there are other factors to consider.\n\nDo you know how much it would be worth as vacant land? \n\nMaybe you could look into tearing down the gas station and getting a McDonald\u2019s/KFC/Chik fila with an absolute NNN ground lease (zero land lord responsibilities). In the long run wouldn\u2019t that be a better investment? \n\nI\u2019m just throwing some ideas out there but it\u2019s best you consult with a couple local commercial real estate agents (try and get a second and third opinion) before you make any decision. Good luck!", "replies": [{"id": "ih98ttj", "text": "Yeah!, Interesting insight, thank you!", "replies": [], "depth": 2}], "depth": 1}, {"id": "ih8zncr", "text": "If it\u2019s in California let me know i got a buyer", "replies": [{"id": "ih98ufy", "text": "Texas...", "replies": [{"id": "ih9o0yt", "text": "Darn ill check if they are interested i doubt it tho", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ih917j3", "text": "What market are you in? You need a broker. To give one tip. It\u2019s more valuable the more term you have. 5 years isn\u2019t much. Gas stations normally sign 20 year primary terms with multiple options.", "replies": [], "depth": 1}, {"id": "ih9n5fz", "text": "C stores with gas stations derive their value from more than just rents and cap rates.  Value greatly depends on BEV.", "replies": [], "depth": 1}, {"id": "ih9uy1n", "text": "Get professional help. If you don\u2019t you are going to lose money.", "replies": [], "depth": 1}, {"id": "iha2t7y", "text": "A 30 year old C store (end of it's serviceable life) operated by a single unit operator is not going to fetch a sub 7% cap unless the underlying vacant real estate is worth $1.5-$2M an acre.(based on your statement that neighbors are priced really low that doesn't seem the case). This would be a sub institutional grade transaction, especially considering you wrote the lease yourself (you probably have some massive liability exposure and should seek legal counsel) but another buyer would want a more industry standard lease in place. I would assume the $600k offer was just a low-ball. I would tell them you are listing it for $1.5M and see if you can't get them to $1M and call it a deal. I would also make sure you get an attorney to write up the contract as you will want environmental indemnification language included. Given the \"hair\" on this deal I think a 10% cap is as optimistic as you would be able to realistically get. As a broker I can tell you will find lots of brokers who will tell you you can sell it for $1.5-$2.5M especially if they thinks that's your expectations, but with interest rate hikes it is not in your interest to have this be a long transaction, I would work to complete this disposition as quickly as possible.", "replies": [{"id": "iha4yb4", "text": "Great comment, thank you!", "replies": [{"id": "ihbljfa", "text": "You would be wise to follow this advice.", "replies": [], "depth": 3}], "depth": 2}, {"id": "ip5kkgi", "text": "How much net worth do commercial landlords like to see usually on a 30 dollars per sq foot space?", "replies": [], "depth": 2}], "depth": 1}, {"id": "iha4gwt", "text": "It all depends on the tenant\u2019s credit, lease term, real estate, etc.  I help operators grow for a living, primarily using the sale leaseback model.  Give me a shout - I\u2019ll tell you what it\u2019s worth, maybe even buy it. \n\nSold three stores south of Dallas last month. Under contract on 5 stores outside of San Antonio currently.", "replies": [], "depth": 1}, {"id": "ihaho9q", "text": "I've read through some of the comments and OPs responses and I think I may have some value to add. \n\nOP, I think your hesitation on value stems from the value of the real estate (land and improvements) versus the going-concern value of the operating fuel station. \n\nOne of your comments mentions the station itself is very profitable. Although you now lease it to a third-party you say that you ran it for some time and are intimate with the financials. The going-concern value includes the real estate, as well as the personal property and intangible value. The going-concern, or value of the gas station operating as a business, may not be equal to the real estate alone, and if profitable would be worth above and beyond the real estate. However, you have a lease for $9,000 a month for the operator to lease the real estate. They operate the gas station and take on the risk of operations including Cost of Goods Sold, contracts, agreements, consideration of inventory, profitability, etc. which no longer is of any concern for you.\n\nThe question is, are you trying to value and sell the real estate or the going-concern (which includes real estate)? Right now due to the lease in place you have a piece of real estate encumbered by a lease for 5 years. However, depending on the profitability of the station, the operator  buying the real estate only might be the deal of the century, as it would further improve their margins. But most likely the current pool of buyers would see an encumbered piece of real estate. \n\nIn theory, if you waited for the lease to end and chose not to renew, you could take back possession and run the station. Then, a new pool of buyers would open up that would be willing to buy the operating business, not just the real estate. And it would probably be a completely different buyer profile that better understands the profitability of the station versus capping a NNN lease.\n\nFuel station going concerns transact on totally different metrics such as Gross Profit Multipliers or even EBITDA multipliers (depending on the market and buyer). So in reality they wouldn't see a 5 year lease for $9,000 a month with the risk of vacancy at the end of the  lease, but the operating financials of the business would dictate value.\n\nI hope this helps bridge the (what I perceive to be) gap between expectation and potential reality of only considering selling the real estate as encumbered. If true, your options could be to:\n\n1. Negotiate with the operator and show them how little of a percentage of revenues the real estate lease is, similar to occupancy costs for a retailer.\n2. You could sell the real estate only based upon the encumbering lease to someone else other than operator. \n3. Wait until the lease expires and then take over operations and sell the going concern for what you believe it would be worth. And maybe even use this to negotiate with the current operator if it is so profitable. \n\nIn any scenario, it might make sense to chat with a broker, but ideally someone with experience selling operating gas stations, as it is niche. In a few minutes I'm sure a reasonable discussion on potential value or even a BOV could materialize. And their assistance with marketing and negotiating could be valuable in ensuring you get the best price possible, which may mean collecting rent for a few years and then selling the business.\n\nObligatory sorry for any typos/formatting as I'm on mobile. But I hope this helps and good luck! If it's as profitable as you say then you may have a diamond in the rough, even with paltry traffic counts (10,000 and 5,000 ADT from a response I saw) from a strictly real estate perspective if it's the only business in town!", "replies": [{"id": "ihal61y", "text": "This is absolutely amazing, I really appreciate you taking the time. Reddit community really is the best.  I will definitely be taking this into consideration and plan on scouting a few brokers to see which one fits the bill.", "replies": [], "depth": 2}, {"id": "ihbls3n", "text": "C-stores are valued with a going concern model plus it real property", "replies": [], "depth": 2}, {"id": "ihh2rrk", "text": "This response is the best advice I\u2019ve read on this thread so I thought I would add on\n\nI advice you to look at the bigger picture. What are your plans with the sale proceeds?  If you are not doing a 1031 Exchange then focus on your after tax proceeds and what return can you can expect to get from an alternative investment. \n\nI certainly don\u2019t advise to take the $600K offer but let\u2019s use it as an example.  I don\u2019t know your basis or tax bracket but let\u2019s assume basis of $300k with 15% capital gains tax (maybe an additional 3.8% NIIT tax). You net $555,000 less sales expenses. To replace your current NOI of $108K will require you to find an investment paying an annual return of 19.6%.  Very difficult to find that anywhere. \n\nFind a good CRE broker who knows the market and product type. As a CRE broker with 30 years of experience, some of my best advice to clients is not to sell or at least not at this time. \n\nThe terms of the lease will have a significant bearing on the value of your real estate. \n\nFeel free to DM and I may be able to connect you with a good local CRE broker.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ihbjz9w", "text": "We value convenience stores based on two things. The straight up land value which includes the minor site improvements Abd the cash flow of the going concern or business on a 5-10 basis.\n\nI\u2019d recommend hiring an appraiser(that specializes in this) paying the $4k to value &amp; recoup the cost at sale.", "replies": [], "depth": 1}, {"id": "ihbk7tz", "text": "What\u2019s the development potential of the site?", "replies": [], "depth": 1}, {"id": "j07lgal", "text": "Have you sold it yet?", "replies": [{"id": "j07ljap", "text": "No sir", "replies": [], "depth": 2}, {"id": "j07m2nn", "text": "Have received many offers but all below asking..", "replies": [], "depth": 2}], "depth": 1}]