Question on how to bake in commissions and TI into Underwriting on value add office deal
I’ve got a 55,000 sf office building with well below market rents. What is the best way to bake in broker commissions and TI allowances? 80%of the building needs to be brought to market rates so my hunch is to just add $100/sf to my yr 1 expenses, that assumes RE-tenanting. Anything else to consider here?
[{"id": "i6cgpmp", "text": "Best way is to talk to the leasing broker who is currently leasing the building, and also talk to some competing brokers in that market and ask them how much is a typical TILC in submarket. Keep in mind shape and condition of the suite are big factors. \n\nThen I would add that to your acquisition basis to truly understand the capital you will be placing to drive at an accurate cash on cash. To get accurate NOI you want to subtract operating expenses from total revenue, TILC is not really operating expense but rather capital expenditure (one time spending) so it goes below the line. \n\nAlso for resell value and refinancing, it\u2019s good to show higher NOI and show how much TILC you spend in the building to make it look nice. \n\nHope this helps.", "replies": [{"id": "i6cvxy8", "text": "Thanks, good advice that helps a lot. Makes sense just need to adjust my worksheet a bit.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i6ch4rr", "text": "Is $100/sf based on anything? That is a lot of TILC unless the building is very rough.\n\nYou would probably create a TILC reserve out of equity as part of a value add plan if you are going to spend a lot very quickly. If this is a multi year plan and cash flow can support it maybe you get there by an annual reserve. What does best way mean, what are you trying to accomplish?", "replies": [{"id": "i6de9g5", "text": "Ya, that\u2019s high.. what was I thinking!? More like $50-$60/sf would be a 30k ft perspective on $2/sf/yr for broker fees, and TI.\n\nMy goal is to build and compare different strategies on getting the NOI maximized", "replies": [], "depth": 2}], "depth": 1}, {"id": "i6dcwcy", "text": "Also consider rental concessions (free months of rent) and holding costs (forgone rent, reimbursements, etc.) during rollover/lease-up.", "replies": [{"id": "i6defbf", "text": "I have an NER worksheet I use when negotiating individual lease deals but it would be good to meld some of those terms into my analysis calculator.\n\nAll the worksheets I have built are very back of napkin", "replies": [], "depth": 2}], "depth": 1}, {"id": "i6ul99c", "text": "How are you going to fully re-tenant the building in year 1?\n\nTI/LCs are going to vary depending on unit size, market/submarket, quality of asset, tenant profile, etc. you can\u2019t just apply a flat $100psf assumption. The correct way to model it is unit by unit based on the timing of when they roll to market or when you expect to be able to buy out each lease.\n\nYou can get ballpark costs by speaking with brokers.\n\nAlso don\u2019t forget to factor in downtime and the probability of some tenants executing their options and not getting to market rent.\n\nNot to be rude, but if you\u2019re looking at a 55k SF building and don\u2019t know how to underwrite this you may want to start smaller.", "replies": [], "depth": 1}]