Placing a value on a commercial property, the value is based on cash flow, not on brick and mortar (unless it has big problems)!
Gross Rental Collections: $100,000
Tenant Reimbursements: $ 30,000
________
Gross Income: $130,000
Expenses:
Taxes: $10,000
Insurance: $ 5,000
Maintenance: $15,000
Misc.: $ 5,000
Management (4%): $ 5,200
______________________
Total Expenses: <$40,200>
Net Operating Income: $89,800
Cap Rate (note 1) ö 10%
__________
Value: $898,000 (2)
1) Cap Rate is a ratio of the desired return on equity, equity & financing terms, it varies from typically 8% to 14%. Most difficult factor to determine, there is a formula to determine the Cap Rate.
2) Just an example somewhat simplified, a serious investor would project this out over several years and do a "discounted cash flow analysis" (IRR).
I hope this is the kind of analysis they have already completed (the longer version) to determine the worth of this asset. As well as a market study. The quality of tenants determine the type of financing terms you will be able to achieve (thus figuring into the Cap Rate).
Some input to how this type of asset is considered. A letter of intent is the first step, next is a formal purchase agreement. A seller of this type of asset is not going to go to a purchase agreement unless there is little doubt the prospective purchaser can perform. In other words, someone better have a track record and some pretty meaty financials, or the purchase agreement does not materialize.
Robert
PS: Maybe by posting news they are submitting a letter of intent on a project this size, it might be telling us something??? Going to a purchase agreement will answer a few questions.
Sorry, tried to line all this up like an Income and Expense sheet, but the spacing does its own thing! |
