Establishing List Price: Underwriting the Asset
Written By Mark Hulsey, Managing Broker
As commercial real estate (CRE) brokers focused on taking investment properties-to-market, it’s critical we approach each building or asset the same way a lender would. Before we establish a list price with our client, Results Commercial brokers must underwrite the asset. In other words, we must take the ‘offering’ apart, piece by piece to study it and be sure it all makes sense as we get ready to turn around package it up.
True underwriting from a lender’s perspective goes well beyond the numbers and includes verification of zoning & use, tenancy, environmental issues, survey, or title considerations. But as we consider a property’s disposition value and how to set a list price, this is where diligent financial analysis and underwriting is required – just like an appraisal.
It really boils down to this for selling commercial investment properties – if the numbers don’t work, it’s not selling. That means if you cannot service the debt, meet cash-flow expectations, hit cap-rate goals, or have required capital improvement reserves, it doesn’t really matter what price you put on the property. Pro-formas are a great tool, but they only get you so far when we need to underwrite to the actual asset performance.
It’s just simply not good enough to tell a property owner of a 5,000 sf, Class B, office building that it should trade for $104 sf. If it’s 50% vacant, we have a problem. If it needs a new roof and HVAC or the anchor tenant is moving out in 15 months, we have a problem. All building and tenant issues are costly to property owners and directly affect the NOI which directly correlates to disposition value.
All these issues must be understood BEFORE listing the property for sale. Often, there are underlying issues that can be easy glossed over with traditional market and income analysis. This is where digging-in deeper early-on, can make all the difference for a successful sale later.
In addition to market & income financial analysis to understand disposition value, Results Commercial brokers prepare a ‘Buyer Term’ spreadsheet that will put debt in-place with current market terms. This is how we better understand the numbers from a Debt Service Coverage point of view – a critical underwriting measurement verifying the income more than covers all building expenses plus debt service. Within this debt service analysis, we can also factor capital improvement costs, tenant improvement allowances, leasing commissions, or holding costs.
Like most industries today, in CRE it’s all about the data. Commercial brokers must have current and accurate market data readily at hand to provide the guidance clients require. Commercial data does not come easy or cheap. It’s a pay-to-play business. Ultimately, the data not only gives us the information we need, but it allows property owners and brokers to make educated decisions on critical commercial investments. The data can get complicated – it’s the CRE broker’s job to extrapolate for relevance.
At Results Commercial we’ve learned over the years it’s essential to put the time in on the front-end of prepping the listing for sale. It’s better to understand the financial upside and challenges to each investment asset we’re selling early-on, instead of seeing a property languish on the market or a deal fall apart down the road due to issues that should have been discovered when establishing the list price.