In a sale, which NOI influences price, projected or current?
When a property is marketed, say a neighbor center in this case, the NOI that influences property value is a projected one, correct? My family has a property that we'd like to sell, but our NOI is lower than it should be because of many unnecessary expenses. This shouldn't impact sale prices, correct?
[{"id": "hu89xim", "text": "Depends on how good the broker and their/their teams underwriting is. If you can track all the capital expenditures most of them will be backed out of good brokerage underwriting. Also, lease type and assessed value could impact value/NOI. Feel free to DM me with questions. 8.5 years experience in investment sale brokerage on a leading team in the US.", "replies": [{"id": "hu8bpkn", "text": "Good point. Pay attention to what the selling agent/ broker puts together but you should do your own cap rate/ valuation. Some brokers will show you in place cap rates whereas other will show you a pro forma cap rate. Once you dig into the numbers you should be able to tell what\u2019s going on.", "replies": [{"id": "hu8fnqi", "text": "The serious brokers will generally have both. No sense in trying to hide current NOI, but every broker seems to be VERY optimistic regarding tax hikes so our pro forma usually starts there.", "replies": [], "depth": 3}, {"id": "hu8lmqg", "text": "And any good buyer will be doing this anyways, on their own, irrespective of a sellers/brokers numbers regardless of which they provide.\n\nA good acquisition team always runs their own underwriting.", "replies": [{"id": "hu8x033", "text": "Yes, don't want to hide anything. But the big question is, do we need to delay the sale for a time, and cut back on unnecessary expenses to increase sale price? Or will more sophisticated buyers see the potential despite the fact that the pervious owners (my family) were just burning money?", "replies": [{"id": "hu91lte", "text": "Sophisticated buyers will strip out extraneous expenses that wouldn't normally be incurred in the operation of the asset. Most qualified buyers will have real time information on expenses for similar properties so if your family was overpaying for any services or incurring expenses in excess of what's expected, the buyer will normalize those.\n\nEdit: it's been said above but this is where a good broker is key as they'll need to go through your expense data in detail to build a convincing narrative to buyers that they could reduce costs once they've acquired the property. The better they do this, the less discounting of the stabilized NOI figure there will be by purchasers.", "replies": [{"id": "hu9c7yy", "text": "Pin this reply to the top, super helpful thanks\n\nserious people have their own data and have got the product type down pat, very practical way of getting to market value", "replies": [{"id": "hubmro5", "text": "Oh gee, I don't actually how to do that. But I agree it should be pinned. It's exactly what I was looking for.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hu8kq88", "text": "What kind of property? Only industrial and multi family are trading on pro forma NOI \n\nJust clean up your P&amp;L and list with a T3\u2026", "replies": [{"id": "hu8whix", "text": "It's a neighborhood service center. How would one go about cleaning up P&amp;L? Making  R&amp;M expenses capitol expenditures? Sorry, new to this. I appreciate your response!", "replies": [{"id": "hu8wqf3", "text": "You said \u201cmany unnecessary expenses \u201c\n\nElaborate please.", "replies": [{"id": "hu8yokb", "text": "\\-Paying our property manager $3700 to draft a two page renewal (which we didn't use, because we had an actual attorney rewrite it. --This type of shenanigans happened a lot\n\n\\-Over paying various vendors sometimes for unnecessary services because the owner is ignorant (power washing 1/week, security patrol 3X/day, etc.)\n\n\\-Spending $20,000 on unnecessary umbrellas, benches, and bike racks (capital expenditure--this shouldn't be a problem)", "replies": [{"id": "hu950dm", "text": "You need to heavily document your expenses and create your own pro-forma for what you claim are one time expenses. $3,700 is a rounding error in most larger annual budgets and should be classified in 1 time Leasing commissions that tend to be escrowed by a bank.\n\n$20,000 is a good 1 time Cap Ex that can easily be excluded from NOI. \n\nAfter you have pulled out all Cap Ex items an appraiser will also review it to see if your operating expenses are reasonable.\n\nI often see small retail centers claim to be NNN leases but don't show CAM charges or True-ups to tenants so lenders will have DSCR constraints on loans that will lower the purchase price if a buyer can't get 80% LTV on a loan", "replies": [], "depth": 5}, {"id": "huakhj4", "text": "The overpaying unneeded vendors is the only trouble spot there. And it\u2019s going to haunt you even if you \u201cclean it up\u201d. As a buyer if I see the most recent numbers are much better, I\u2019ll ask why. I\u2019m watching for an owner who\u2019s going to do their own cleaning, cut their own grass, wash their own sidewalks for a single year to try to get a ~20x on the savings in higher sales price. Every $1000 you shave in maintenance costs go straight to NOI which is $20k higher sale price at a 5-cap.\n\nAlso, as others have said, if this is NNN you shouldn\u2019t be paying those expenses. If you are, buyer is going to mentally subtract from rent roll as it\u2019s not true NNN. \n\nSo is the higher NOI sustainable? Does new owner want to do weekly power washing themselves rather than hire it? If you say it doesnt really need to be done, will you come do it for me for free if it does? Otherwise it\u2019s getting negotiated from sale price.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hu8not5", "text": "There is typically an as-is and upon commpletion value if appraised. Or a dcf approach if theres significantly variability in cash flow projected due to tenant turnover.\n\nIn other words, if you're selling you're going to want to create a proforma approximating reality in terms of stabilized financial performance. You'll likely get talked down due to the fact it is not stabilized, but leave that up to the prospective buyer(s).", "replies": [{"id": "hu8ziid", "text": "Thank you. I'm asking because one of the stakeholders wants to delay selling until we've cut out unnecessary expenses, and maxed NOI. I want to press him on whether this is necessary because delaying will be at great personal expense to me.", "replies": [{"id": "hu90dyj", "text": "I mean don't get me wrong, there are buyers out there that want turnkey investments and if they're purchasing it fully occupied &amp; leased up it may command a premium. So many variables though. I model CRE deals for a living so if you want me to put something together PM me.", "replies": [{"id": "hu92jqw", "text": "What state are you in? Yeah, we about 95% occupied. The property is pristine in a neurotic way.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hu8uk2d", "text": "Depends on how reliable the projected is. You'll need a really good explanation to add back a large percentage of prior year actual expenses. Even if you convince the buyer you still need to convince the appraiser &amp; and a lender that the proforma holds water", "replies": [], "depth": 1}, {"id": "hu91psk", "text": "Depends on kind of expense, one time or recurring. All one time expenses can be grouped together and added to NOI, but be diligent about it any how typical buyer will ask for 3 year accounts, if it is recurring then, buyer will figure it out and will reduce the NOI.", "replies": [{"id": "hu92bnj", "text": "For example we've been over paying various vendors sometimes for unnecessary services because the owner is ignorant (power washing 1/week, security patrol 3X/day, etc.) Like, it's absolutely pristine, but in a neurotic way. \n\nCould we lose value because of this?", "replies": [{"id": "hu92vc4", "text": "Yes, but savvy buyer may also look at it that he can cut lot of cost and increase value. So be particular on the price you want for the property and stick to it. Brokers may give high numbers and may try convince to sell lower. If you are not on a hurry stick to it and also start cleaning up your expenses. Be honest with the buyer and show him what is happening.", "replies": [], "depth": 3}, {"id": "hu96psi", "text": "You own a retail center and should have Triple NNN leases that pass back these expenses. \n\nIf you are not passing back these expenses then, you either have bad leases or bad property management.\n\nA buyer and underwriter will question why these expenses are not being passed back to tenants. Additionally if you start passing back these expenses to tenants they might not be able to afford it or complain and end up losing tenants.\n\nYou will need to review leases and see if you can pass back expenses and evaluate if tenants will stay while passing back expenses. \n\nBuyers and lenders will see that you aren't maximizing value of the property by not billing the property as NNN and pay you less.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hua0gay", "text": "I know almost nothing about commercial real estate, but I did read crushing it in apartments and commercial real estate (which is fantastic IMO) and the author says that if you are buying commercial real estate and they are using too rosy of a pro forms for valuation and you purchase it at that price you are essentially paying for it twice. Like if you are paying based off an NOI of all these expenses being cut and all the units being rented out, but the expenses haven\u2019t been cut and there is vacancy. Then you are over paying because if it is that easy to cut expenses and fill vacancies, then that should already be done. Just something to think about. Also read that book lol", "replies": [{"id": "hualk3m", "text": "Yeah this is exactly right. But seller always asks for pro forma and buyer offers based on actual then you negotiate. \n\nIn my market I see some sellers offering 12 mo credit for the vacancies when asking pro forma, it\u2019s at least a nod to the value of the effort of filling them.", "replies": [], "depth": 2}], "depth": 1}, {"id": "huad7aa", "text": "Most definitely! 4 and below not as much. But 5 units and above the noi is how they value the building.", "replies": [], "depth": 1}, {"id": "huadel9", "text": "I do commercial property tax appeal work. I often start with 8825 forms and the owner shows that theyre breaking even or negative- how could they be valued so highly? But then i dig in, and its bullshit bullshit bullshit on the expenses. Either categories that noone else uses or way out of line with the area/region or expenses that should be attributed to the business and not the property. There are several providers of aggregate data that have info broken out by region and property type. Rerc comes to mind, korpacz is good too. Granted, property tax valuations are done in a slightly different manner, but i excel at spotting what belongs and what doesnt since i dont just go up against a buyer/seller but through a series of local and state level boards that all take a look at my numbers", "replies": [], "depth": 1}, {"id": "huafup0", "text": "Your buyer will want to keep those expenses and you will want to remove them. That's the game. For the buyer, they want to purchase on that lower NOI regardless of if they are actually planning to run the same way you are. You want to maximize the pricing, which typically means pointing to future cashflows and having the buyer pay a premium to get them. But if you have a shabby as-is building for sale, buyers feel justified pointing to historical financials and operations to ding you on price.\n\nJust like there can be a period of stabilization of 3-6 mos before a refinance, you should plan for the same before a sale. Kick your team's ass to get the financials (expenses) in order for the sale. Outlay some capital for curb appeal. De-risk the rent roll by renewing any near term lease expirations, especially any anchor tenants, so the cash flow has more value. Longer remaining lease terms from strong tenants are valuable and less risky. Make the property easy to finance for a buyer. Then you should be able to justify pricing on the next year's anticipated NOI and a cap rate on the lower end of your class, condition and market.\n\nAlso keep in mind the pool for buyers can be limited for small neighborhood centers. You want to price so they are paying a premium for your family's needs but feel like they are getting a valuable deal that won't last.", "replies": [], "depth": 1}, {"id": "huagazr", "text": "IMO the answer is it depends on the buyer; size (and deal size), sophistication, and ability to take down the property without aggressive debt ratios. Some of the expenses you list are below the line (CAPEX) and shouldn't affect NOI, others one-time and easily discernible if you break them out in sub-categories during dd. If your leases allow for this I'd focus on clean recoveries - in other words are you adhering to the lease for recoverable expenses due from a tenant. The amount you can recover is typically shown above expenses.   \n\nWhatever the broker shows in the OM is usually a starting point at best although results may vary", "replies": [], "depth": 1}, {"id": "hue0o53", "text": "It really depends on the property. Were they unnecessary expenses or capital? If they\u2019re capital expenses, no. If they\u2019re actual operating expenses most likely yes.", "replies": [], "depth": 1}]