What is that office building worth? - Wert-Berater, Inc.

June 6, 2010 - PRLog -- What is that office building worth?

In recent years to office building market has suffered decreased rental rates and increasing vacancies.  A number of brokers have reported that recent leases have also been short term of less than 3 years in many cases.

"I paid $0.50 on the dollar!" is something we hear a lot in our offices.  The question we ask is it still a good deal?  Often those who purchase based on old appraisal data or what the building sold for in the peak of the market do not realize those past items are no longer important.

The dollar has increased in value in the recession as real estate has seen deflation at work.  Prices have fallen because of the lack of quality tenancy.  And to make matters worse, many tenants leave often broken their leases to seek out lower rents.  

The market is in a downward spiral it seems from 2008 to present 2nd Quarter 2010.

So, the question "What is that office building worth?" is not easy to answer; but proper due diligence can help to mitigate risk.

When seeking to purchase an office building we suggest that a prospective buyer gain the option to interview the tenants.  If local rents have decreased they might have a legitimate argument for lower rents.  Thus, the purchase price should be negotiated based on the stability of the tenancy.

All items must be reviewed.  The cost of suing a tenant who leaves is high and may provide no additional cash flow to a new buyer.  It is also time consuming.  Ask the seller for their files that not only includes the original leases, but all amendments, letters and e-mail correspondence with the tenants.

All contracts for all service providers must be carefully reviewed.  All inspection reports, insurance policies, past appraisals, past environmental reports, all structural reports must reviewed.  The seller must provide a complete detailed list of all major capital items including receipts.  Review all past title reports.  

New reports to be ordered include Phase I Environmental Report, 2 appraisals, building inspection, structural report, and title report.  All of these reports should be carefully reviewed by a third party who then reports to you, the buyer.

The only way to understand the value of the building is to know what you are getting yourself into.  An appraisal is not your best guide.  The data is historical and the methods do not include serious due diligence.  An appraiser is limited to comparing similar sales, capitalizing the income as it is reported to them and comparing financial feasibility via a cost approach.

The appraiser is not qualified to provide opinions of title, property condition or environmental concerns.  Often lenders ask appraisers to comment on these items, but it is worthless.  They are not qualified.

Moreover, do not be pushed into a "quick close".  The better the deal may seem the worse it may be.  It takes 90 days to properly complete due diligence.  Take your time.  If the seller pressures you, move on.  It's amazing how many sellers will pressure buyers and when you look back 6 months or even a year, the building is still on the market.

You are not buying real estate you should tell yourself.  You are investing to earn cash flow.  The real estate simply houses the tenants who pay you.  Style, appeal and condition not to mention location are why tenants pay.  But, the real estate is only worth what it can provide in rents.

Wert-Berater, Inc. provides environmental, civil engineering, market studies, feasibility studies and appraisals for real estate.  A complete due diligence package review is crucial.

Contact Wert-Berater, Inc. at 888.661.4449 or visit the company website at http://www.wert-berater.com

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Teamed with VTN Consulting, Wert-Berater provides all civil engineering, construction consulting, appraisal, feasibility study, and risk management services to lenders, investors, commercial and investment banks. http://www.wert-berater.com