Dealmaker's Guide Questions - Posted by Bob

Real Estate Investing Office
1

Posted by ray@lcorn on June 20, 2006 at 21:44:19:

Bob,

I always reserve the right to revisit the price based on complete due diligence.

In many cases the vacancy factor is the least of the problems! e.g. deferred maintenance is often the biggest point of contention.

ray

2

Dealmaker’s Guide Questions - Posted by Bob

Posted by Bob on June 19, 2006 at 14:12:57:

Ray, fantastic book. A real tour de force for anyone who wants to be in this business. If I had it 15 years ago, it would have saved me alot of mistakes. Highly recommended.

Couple of questions:

  1. All setups that are created for sale use proforma income numbers, which you do not. How do you craft an intial offer on a property or do an initial valuation using these numbers. Most sellers are not going to provide actual income statements up front.

  2. In my area, there can be, depending on the locality, significant ancillary income, specifically parking. How can you stay competitive in the marketplace if you are disregarding that income?

3

Re: Dealmaker’s Guide Questions - Posted by ray@lcorn

Posted by ray@lcorn on June 19, 2006 at 21:19:08:

Bob,

Thanks for the kind words… and thanks for letting me know I hit the mark. My goal was to write the book I wished I’d had 25 years ago, and I hope it serves you well.

To your questions:

  1. I usually take the pro forma numbers at face value to determine my initial interest. A deal with an asking price of a 7% cap is probably not going to get better with the actuals, so I don’t even start. But one priced more competitively has promise. Between getting the actual numbers and the air out of the asking price, if they meet in the middle a deal might be possible.

Evenso, maybe it’s because of the nature of deals I work, but in my experience most sellers expect to supply the real numbers, and will when asked. Brokers sometimes create hoops to jump through in order to qualify the buyer, and I’ll usually go along to get started. But I make it clear up front that I won’t make a serious offer without seeing the actual operating statements.

I may compromise and accept the current rent roll to further determine interest, but will then condition any LoI to confirmation of the numbers. Remember DealMaker’s Ruke #8, “Those who want least, win.” For me that means when I’m the buyer, I buy on my terms, or not at all.

  1. The types of ancillary income I exclude is that which has a different expense profile, asset life, and management requirements (anything more than collecting rents) than the property itself. Examples are laundromat equipment, vending machines, video games, etc.

Parking is a different animal than those above. Depending on how it is operated it can be (a) an additional legitimate income stream from the property which adds value; (b) a more valuable asset than a building; or (c) less valuable.

(a) In the case of an office building in a downtown area, parking is often leased out on a monthly basis to the building tenants, and collected with the rent. In that case I would include the parking income with the building rents.

From there it gets more complicated:

(b) If the parking is a separate operation from the office building, and perhaps NNN leased to an hourly public parking lot operator, then ground lease valuation would be appropriate, ~5.5%-6.5%.

(c) If the parking is for public use operated by the building owner on less than monthly agreements, then I would value that portion of the property as a business, at a much higher cap rate than the property. Business valuations are framed in terms of multiples of gross revenue, the equivalent of 20%-30% cap rates.

Last, and to further muddy the water, an appraiser will value the land under the parking based on a ground lease value, whether or not a lease is in place, in which case I would likely have a hard time coming to agreement on value.

For me the acid test is whether it will take more effort or risk to collect the income, factored with the historical stability of the income. The only way I would completely exclude the income is if the historical performance is spotty or undocumented.

Hope that gets close. With more detail about the particulars there could be additional considerations.

ray

4

Re: Dealmaker’s Guide Questions - Posted by Bob

Posted by Bob on June 20, 2006 at 07:33:10:

Thanks for the response. Getting back to the pro forma income numbers. All brokers list the gross less a vacancy factor. Assuming you cannot get the actuals before making an intial offer, would you then base the offer on the numbers provided with the caveat being if the actual collected income falls short, you reserve the right to adjust the price accordingly. I think a seller or broker would have a hard time disputing that.

As far as parking, it makes sense. I’m refering to apartment buildings. In the town that I own in, there is no street parking allowed overnight. Which makes the parking lot very valuable. But other municipalities do not have the same ordinance which makes the parking lot less valuable. I guess it all comes down to what you’ve been saying, verify the actual collected numbers and use them in your analysis.