Jan 18, 2019

Quick Underwriting Question

Hi all,

I just graduated and started a new job as an acquisitions analyst and am underwriting a value-add office play. The property is NNN leased at 60%.

Dumb question, but how would you go about valuing something like this? I know you take TI/LC into account, but how do you come up with purchase price? We look for a 2% spread at disposition so I'm just trying to work this out.

I'm thinking I take my year 4 NOI and apply our exit cap, then subtract TI/LC and apply our exit cap minus 2%
(our spread) to come up with purchase price. Am I looking at this correctly?

Thanks for any guidance!

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4 Comments

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From the sounds of how your shop values property, then yes, you'd look for a two point spread on total costs vs exit cap. So if you're projecting an exit cap of 6.00% in year 4, then I would say your shop wants your return on costs to be 8.00% or greater in that year. After you determine your leasing assumptions, you'll arrive at your projected stabilized NOI in Year 4 and should be able to back into what your total costs are based on 8.00%+ return on cost. Then back off your cumulative TI, LC and CAPEX to get to that NOI to arrive at what you hypothetical max purchase price could be. I'd probably confirm this pricing with other metrics such as cost/sf, going-in cap rate, what IRR/EM that purchase price would produce, etc.

Authored by: Certified Real Estate Professional - PrincipalCertified Real Estate Pro

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Authored by: Certified Real Estate Professional - Executive DirectorCertified Real Estate Pro

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