Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Analysis Reflecting a Large Vacancy with a Tenant in Tow

Why does one party perceive that a certain real estate investment is a good buy while another party feels it is overpriced? The answer usually revolves around one's perception of how to create value, or to put a label on the concept of “vision.” One party envisions how he can create value while the other party might see dangers and pitfalls.

Let us assume the rent roll is as shown in Exhibit A.3 in the companion website, with a 17,723 square foot vacancy. A new buyer, Smart Investor, paying market value based on the current occupancy contracts to buy the project for $12,000,000, which is a 5.15 percent Cap Rate on the existing NOI of $618,420 as shown in Exhibit B.2 The Cap Rate is quite low. No income is attributed to the vacant space in determining NOI. Consequently, Smart Investor has a large upside if he can execute and create value by leasing up the vacant space. The purchase price is at $200 per square foot ($12,000,000/60,000 square feet). This figure is significantly below replacement cost for a quality medical building with internal tenant improvements in place. Assuming Smart Investor's down payment is 25 percent of the purchase price, the initial investment is $3,000,000 with financing of a first trust deed of $9,000,000 at 5.50 percent interest-only for the first three years, then 30-year amortization.

Let us further assume that our prospective buyer owns and operates surgical centers, so that upon acquisition ...