What would you pay for this bank owned strip center?
What would be a reasonable offer for this type of bank owned property:


year built: 2009 (physical condition is excellent)

Square ft: 9500

Current Occupancy: 45%

Rent: $14/ft2

Tenants: One of the largest national pizza chains and a optometrist office (both solid imo)

The catch: Its located on a route in between two towns about 7 miles apart. One of the towns is directly off a major interstate. There is heavy traffic on the road (dont have exact counts). I think the space between will slowly fill in. There is an elementary school directly across the street from this property.

List price: $950,000


I think the list price is a little steep for a property that was vacant for a long time and is still only 50% occupied. 

Do you guys think it would be reasonable to get this property at a steep discount (at least 50%)? I would be able to pay cash for it if I can get it under $600,000 but would prefer to get it financed. If I could get it financed at a price where the current income covers the mortgage payment, I would be looking at a nice return if I can get the rest of the space rented out.

What do you guys think?

[{"id": "clelcxk", "text": "Need more information on rent and expenses.", "replies": [], "depth": 1}, {"id": "clem6b5", "text": "NOI?", "replies": [{"id": "clempzp", "text": "Approximately $52,000 ", "replies": [{"id": "clhzfix", "text": "Is that actual or market?\n\nThat is a REALLY low cap rate they are using (like 5.5%).  In my market, that sounds overpriced.  Cap rates have been upwards of 8% and higher here.  In your case that would equate to an asking price of 650,000 or less. \n\nOf course, valuation is going to be based on market lease rates with only 5% vacancy and credit loss built into the NOI, so if it's actual NOI of $52,000 with the 50% vacancy then that doesn't effect valuation. The appraiser will likely estimate a stabilization period and discount the price accordingly.\n\nOne additional hurdle I hope you are considering is that you're never going to get financing on that property unless you have the vacant units pre-leased, or the existing tenants can cash flow the loan at 1.25+ to 1 on their own.\n\n ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "clep128", "text": "That would put it at a 5.4% CAP rate.  Which is way out of range for that type of property.  Typically a MFH development with a NOI of +$1.0mm is in the mid 5 to low 6 range.  Do some research on the CAP rates in the area.  The NOI seems a little high based on your rent figure of $14.  Current tenants are paying around $12.16/ft.  Has the remaining 4500 sq.ft. ever been built out?    ", "replies": [{"id": "clf61cd", "text": "The remaining space has never been built out. Cap rates for similar properties in this area are 8-10%.\n\nWhat did you mean by the NOI seeming high? I haven't actually gotten a P&amp;L yet. Just going by what was stated on the flyer.", "replies": [], "depth": 2}], "depth": 1}, {"id": "clep670", "text": "Buying vacancy like that means you need a good understanding of how long it will take to lease the property, at what rate, and at what expense. I've seen more than one retail project where the cost of tenant improvements and broker commission makes signing  good tenants a break even or net loss proposition. That means you have to turn to the rim shops, western union clones, and other similar tenants.\n\nMake sure the competing rental comps that lead you to $14/SF have been adjusted for traffic count and sign visibility.", "replies": [{"id": "clerqpu", "text": "This is the problem.  You can model this thing out all day but if the market is abysmal (which it often is for unanchored retail ... not to mention it sounds like a small town), then you will just never get it leased up, so be careful.", "replies": [], "depth": 2}, {"id": "clf698d", "text": "How much do commercial brokers normally charge to find good tenants? Also, I know its probably situational but is there a rule or formula for estimating tenant improvement allowances?", "replies": [{"id": "clflsvz", "text": "In my market, generally speaking, 4% of the net rents go to the tenant's broker.   Now if you'd like to get some play on the space maybe offer a $25 Gift card for brokers touring with a client.  Or perhaps a 1/2 point extra for signing a lease during a certain time frame.\n\nAs for TI's, it really depends on the tenant, term and credit.  There are just too many variables for a rule or formula.  I think if you have 2nd generation retail space then you should calculate how much it is to white box the space and then provide a flooring and paint allowance.   ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "clepq15", "text": "Is that $14psf NNN or gross?  \nCan you rent the rest of the space at the same rate?  \nHow long are the current leases?  \n\nIf current NOI is $52k (must be NNN), then 95% occupancy NOI could be around $110k. That's an 11.6% cap rate if you can lease it out at the same rate. That's pretty good. Get it for less if you can, but the price might not be as bad as you think.\n\nGet it leased up, sell a $110k NOI at an 8% cap rate = $1,375,000.  \nYou make $425,000. If you put in roughly $250k, you make 170%. \n\n\n", "replies": [{"id": "clesled", "text": "You are excluding the cost to lease up a center.  There is TI involved and leasing commissions.  ", "replies": [{"id": "clesz6w", "text": "Okay, so he puts up $425k and only makes 100% cash-on-cash.", "replies": [], "depth": 3}], "depth": 2}, {"id": "clfbysb", "text": "This is an extremely optimistic view to take on a bank-owned, probably non-urban, probably non-shadow property. ", "replies": [{"id": "clfjbxx", "text": "Seriously? I lead with three questions and an \"if\" statement and you think I am extremely optimistic?\n\n&gt;Can you rent the rest of the space at the same rate?\n\nI think this is the key question. In fact, I should have asked, \"Can you rent the remaining space in the next 6-9 months at those rates?\"\n\nWith some good due diligence and knowledge of some potential tenants looking for space, this property has potential, and the price may not be out of line. If it's five miles from the interstate in rural Nebraska with declining population, the upside is probably limited. I don't think he's going to get it anywhere near $600k. Heck, an 8% cap on current NOI puts it at $650K and it's not even half full.", "replies": [{"id": "clfx88h", "text": "Yea this property isnt exactly in a rural location, just undeveloped. The two towns are actually suburbs of a pretty nice midsize city. The space between the city and the towns has filled in nicely and I think the route between these two towns is due for some development as well. I just don't think it would be a good idea to overpay right now based on future potential.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cleuthg", "text": "I did the math and ended up in about the same place as /u/KyOatey. \n\nIt sounds like the seller is attempting to capture 70% of the leased-up value when it is currently operating at 50% of it. ($950k/1,350k when it should really be more like $650-700k based on current performance)\n\nThe only way I would do this deal is if I could satisfy at least 2 of the following 3 criteria:\n\n1. I had an absolutely solid plan to lease up the extra space, preferably to an anchor who would attract other tenants\n\n2. The seller would drop to 50-60% of the leased-up value to leave me a profit margin for the work of leasing it up\n\n3. The center was clearly on the path of developmental progress\n\n", "replies": [{"id": "clf626k", "text": "So is it reasonable to make an offer based off current NOI?", "replies": [{"id": "clf6a0v", "text": "Yes, that's what I would do unless there was some compelling reason to give the seller a valuation based on potential future revenue. \n\nAnother factor is how long the current tenants are likely to stay. If business is good and they are at the start of 10 year leases, that's worth more than if they are slowly dying and about to vacate. \n", "replies": [], "depth": 3}, {"id": "clgo9qz", "text": "Not unless that property is stabilized and there is an argument that you are never going to get tenants for the remaining space.  If your numbers aren't completely wrong there is some value attributable to the vacant space.  Even if you could only lease it up for $10/SF NNN and had to sell it at a 10% cap, you would have to spend $100/SF on leasing (TI, LC, lost rent, legal, etc.) before it had no value.  You can make the offer based on what ever you want, but that doesn't mean the bank is going to accept it.", "replies": [], "depth": 3}, {"id": "clmfxwk", "text": "That should be a key metric of your offer. \n\nUnless the tenants have above market rent and the spaces will have high TIs when they move out. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "clfgu78", "text": "5.4% cap rate seems overpriced... however, everyone is going to give you different ways to evaluate the property.  Looks at comps.  Ask a few brokers in the area that are impartial and have nothing to gain from giving you advice.  Be patient.  Good commercial deals can take decades to find.", "replies": [], "depth": 1}, {"id": "cljm7fb", "text": "Its tough to say as we don't know the market but even if I though I could relet it easily, I would still want a big price break. Make a low offer and see what happens. &gt;What would be a reasonable offer for this type of bank owned property:\n\n&gt;\n", "replies": [], "depth": 1}]