Backing Into an Offer Price on Vacant Commercial Property | Office Hours
A vacant commercial building isn’t a problem, it’s a pricing puzzle.
Most investors either lowball and lose the deal, or overpay because they don’t know how to value a property with no income. But vacancy doesn’t mean the building is worthless. It just means you have to price it based on what it will earn, not what it’s earning today.
In this video, I’ll walk you through exactly how to back into a maximum allowable offer (MAO) on a vacant commercial property using simple, repeatable numbers:
Estimating realistic market rent per square foot
Turning rent into NOI (after vacancy and expenses)
Using cap rates to find the stabilized value
Backing out your required profit and returns
Budgeting TI, lease-up commissions, and carry costs
Setting a hard ceiling on what you can pay and still hit your goals
You’ll see a full example on a 10,000 SF building, how I target a 2x equity multiple over five years, and why I’ll walk away from any deal where the seller wants tomorrow’s value at today’s price.
If you’re looking at vacant or underperforming buildings, this video will show you how to stop guessing, start underwriting like a pro, and write offers that protect your downside and hit your return targets.
Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com
Key Takeaways:
Vacant properties still have value – you must underwrite future income and back into what you can pay today; don’t let brokers sell you tomorrow’s value at today’s price.
Start with market rent per square foot – use similar properties, OM data, LoopNet/Crexi, and broker conversations to estimate realistic market rent, then compute gross income and NOI (after vacancy and operating expenses).
Use NOI and a market cap rate to get stabilized value – value = NOI ÷ cap rate; track offering memorandums in your market to understand realistic cap rates for different asset types and conditions.
Build in margins for risk and returns – target a required equity multiple (Tyler uses 2x over 5 years) and make sure your maximum allowable offer (MAO) leaves room for both value creation and investor returns.
Two main MAO approaches – (a) pay no more than ~75–80% of stabilized value all-in, or (b) start from stabilized value and subtract required profit, capex, TI, lease-up commissions, and carry costs to get your max purchase price.
Don’t ignore non‑purchase cash costs – beyond the down payment you must plan for closing costs, tenant improvements, leasing commissions, construction/renovation, and carry costs during vacancy; these can easily push your true “all-in” basis much higher..
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
Tyler Cauble 0:00
I this episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way go to www.crecentral.com to learn more. You know, most people look at a vacant commercial property and they ask themselves, what should I be offering on this, right? Commercial real estate is very different from residential when it comes to comps, because it can get more nuanced, more complicated. But if you don't have a net operating income, and there's no cap rate that you can actually apply to determine what that property is going to be worth, like, let's say it's vacant, right? What can you pay and still hit the returns that you need to justify doing the deal? Today, I'm going to show you guys how to back into an offer price on a vacant commercial property. This came up on our accelerator mastermind call last night. Ryan, one of our members, is working on a deal, and I thought it was, I couldn't stop thinking about it last night, because I was like, this is a, this is a really interesting situation, because a lot of us will come across this as commercial real estate investors, where maybe there's not a good list of cops, right? He had gone through and pulled, you know, comps from the tax records, and I think within the last year, there were only four or five properties that were similar that had sold, which is fine, but you ideally want a lot more than that, right? So what do you do when you're trying to determine your maximum allowable offer on a vacant commercial property? I'm going to walk you guys through how I would do that. Today. We'll be whiteboarding everything. So stay tuned. Welcome back to office hours. This is the weekly show where I go live from the cobble group Studios here in Nashville, Tennessee, to answer you all's questions on commercial real estate. So if you want to know how to get into brokerage, how to get started as a commercial real estate investor, if you're working on a development and you want my opinions on it, jump in the comments. Let me know what you got happy to provide the advice it is, you know, worth what you pay. So keep that in mind. Of course. Let's see here. I will get to my updates at the end, because we have a lot to be covering today. So I'm going to walk you guys through really kind of how to back into a max offer price. We're going to be using the market rent per square foot, all right, cap rate, the stabilized value with that cap rate, your required return. I aim for a two times equity multiple over a five year period. Essentially that means, if I am putting in $100,000 I want $200,000 back in five years. And then we'll talk about some debt and down payment assumptions. We're really going to be using about 25% down 5% down payments simply because that's the most common All right, so when a property is vacant and there's no income coming in, how do you know what it's worth, right? A lot of newer investors will get stumped by this, or they'll overpay, right? Or they'll just low ball and they can't get the deal because they don't actually know how to properly approach this. So I'm going to show you literally how to reverse engineer what's going to make sense for you. Now, ideally, in a perfect world, the seller just tells you what they want for it. Does that always happen? Absolutely not. That is, that is the biggest problem with all of this. Kimberly is saying, hey tower, thanks for putting this in the accelerator so I didn't miss it. Absolutely. Kimberly Chase is saying the same, glad to have you guys here. Ted is saying, Good morning. Thanks for being here for us. Absolutely. Ted, happy to do it, man. All right, let's dive into this. So obviously, this is not going to be an exact appraisal, right? And this is going to be very nuanced for each of you, everybody's going to come to a different conclusion on what the value is based on your debt assumptions or based on your equity return requirements. All right, here's basically what we are going to be looking at today. All right, you got your rent per square foot? All right, we're going to take that that's going to give us the NOI when we look at the, you know, overall square footage of the property. Now, this is your market rent per square foot, because you may not have, I mean, again, if it's completely vacant, you're not going to have any comps in that property. If it's mostly vacant, those leases could still be old or under market. So you want to be looking at comparable properties in the area to determine what that rent, price per square foot is, right? Actually, let me back this out a little bit, because we do want, where's my eraser? Here it is, jeez, we do want to get our gross income first. Now, the reason I. Glanced over this typically, oh, man, all right, gross income. Now the reason I skipped over that the first time, typically, we're looking at triple net leases, and your NOI is basically going to be your gross income and your net income at the same time, depending on how you want to look at it. Of course you could say, well, actually, triple net gross income is going to include your your pass through reimbursements for the triple net expenses for simplify, simplifying the purposes, let's just say, let's just add it back in here. Okay, so you've got your rent price per square foot. You multiply that by the square footage of the property, that's going to give you the gross income, all right? That gives you the net operating income, which we have talked about many times on here before. And then from there, you're going to get your stabilized value, all right? That's going to help you determine, you know, based on a cap rate. We're going to then look at your required profit, or returns, however you want to look at it. All right, they're basically the same thing. And then that is going to determine what your max offer is. Some people call this the Mao maximum allowable offer. All right. So if we want to dive further into this sequence, kind of how it really works, we're going to estimate what the property can rent for once it's stabilized. All right, you're going to then convert that into the net operating income. You'll apply a market cap rate to really estimate the value. Now, what is the market cap rate? Well, the best way to go out and find this data is to look through offering memorandums of properties for sale in your area. Now, you should be constantly looking every time anything comes available for sale in your area. Reach out to that broker, get an offering memorandum, figure out what they're asking, catalog it, keep it, because that is data that you can hold on to, right and keep, which means that you'll be able to, I mean, I've got, every single time a property hits the market for sale in East Nashville, I have the offering memorandum because it helps me understand, okay, this is a brand new building. Here's what they rented it for. Because they have to, they have to, they show the rent rolls, right? I mean, if I'm interested in buying it, I need to know what it's going to rent for. They show me the lease terms, right? And then I get to see, okay, well, they're asking x and the NOI is this. So here's the cap rate that they're asking on this property. Then I can catalog that of like, okay, well, this is a brand new construction, three new restaurant tenants. Here's what that cap rate goes for. Cool. Next time I come across something that's new construction, or I want to build new construction restaurants and sell it, that's I that's probably going to be a very good comp for me to have. All right, you'll work your way backward from your return target. All right, so let's say you know somebody that wants to get a two times equity multiple on their investment, compared to somebody that's going to get a three times equity multiple, is willing to pay more for a property, right? If you're if you're good with a two times equity multiple, which I am, that means that my maximum allowable offer is going to be higher than somebody who has to get a 3x return, right? We see this a lot in residential construction these days, where, you know, typically, if you're building residential you want to build on a five times lot cost. What that means is, hey, if I'm if I'm willing to pay $100,000 for a lot, I need to build a $500,000 house, like, that's what the house needs to sell for. But some people are willing to operate on a four times lot cost, meaning I'll pay $100,000 for a house that I only have to sell for 400 grand. That's too risky. I don't like the margins there. It's not fun. I would absolutely not do that. Pine water is saying, Good morning. Tyler, good morning. Pine water, glad to have you here. All right, then from there. Really the big thing is going out and finding what this rent price per square foot is going to be in your Whoa, in your market. All right, there's going to be a lot of numbers out there that you can find on loop net and on crexie. And, you know, I mean, I can show you guys how to do that, but basically, you just go to your area you see what's available for rent that's in a similar size range. That will help you determine at least what the asking rents are in that area. I would call brokers and figure out what they're seeing in the market that is actually getting signed. Most brokers, if you build a good relationship with them, will be willing to share this information, right? I was just on a call with some other brokers the other day where they were talking about what all the TI packages looked like for rents at specific levels, right? Somebody who's willing to pay $175
Tyler Cauble 9:56
in rent in Nashville, which is crazy that that's, you know, we've got. Gotten to that point in some areas. You know, what does that ti package look like? Right? That's entirely different than somebody that's willing to pay 50 bucks a foot right? Now, obviously you're going to be in different areas, different levels of build out all of that kind of stuff. All right. So the big point that I want to make here is that vacancy doesn't mean that a commercial property is valueless. There is still inherent value there. You just have to underwrite the future income and then back into what you are willing to pay. So let's use a simple example here. All right, let's say that we've got a 10,000 square foot building. Okay, very round numbers. I always like to do that. Let's say that market rent is $18 per square foot on a triple net basis. All right, that's going to give us an noi of $180,000 per year. All right. Now, there's a lot of other things that you may want to take into account. When you're looking at this. You might want to underwrite it like a bank will, right? They're probably going to apply a 5% vacancy rate. Right? Even if you have a single tenant deal and you have a 10 year lease, they're still going to apply a 5% vacancy rate, right? So that would be essentially minus $9,000 all right. Now that'll give you an noi of $171,000 so you would, you'd kind of look at it from a couple of different ways. All right. Now it depends drastically what type of lease that you are doing here? All right, if you're doing triple net, it's going to be a lot easier for you to back into this number than it is if you are doing a modified gross or even especially a full service gross lease. All right, if you are diving into a full service gross lease, that $180,000 a year is only scratching the surface. You need to make sure that you're going through and cutting everything out that you possibly can, that you're going to be responsible for paying for as as the owner. All right, so you know, you guys know this, but your NOI is your effective gross income minus your operating expenses. So here's the thing, like, if we're looking at we change colors here. If we're looking at a full service gross lease, you're basically going to have what's called your, you know, there's a bunch of acronyms in commercial real estate. Welcome to the to the universe. You're going to have your PGI, which is your potential gross income, right? And we're basically saying that that's 180,000 roughly, right? You're going to subtract vacancy from that number. You'll subtract your operating expenses, right? So think taxes, Cam, insurance, utilities, ah, and then you'll add in additional income. So that could be, you know, hey, do you have paid parking? Do you have a vending machine, you know, stuff like that, all right? And that is going to give you your noi, okay? So it can get more complicated. It can be very simple. It just depends on the lease structure that we are looking at, all right. So for this example, let's continue with this saying, you know, we've got 180,000 a year. All right, 180,000 a year? No why? Let's say that this is not necessarily a triple net deal, all right? Or, let's just say that that 18 per square foot actually includes your triple nets. Because typically, when you're going to be looking at the gross income, even on a triple net property, it's going to have, it's going to look just like a full service gross lease. I've had members bring this up as well, like, Hey, why are, you know, why is the, you know, there's a gross rent, then there's the base rent. We've got to subtract all these expenses out. I thought that the tenants paid for cam tax and insurance. They do, but they reimburse you as the landlord, so your profit and loss will actually show a gross rent minus cam tax and insurance. There, there is your base rent. All right, so with that $180,000 a year, we've subtracted our 5% vacancy. All right, that gives us $171,000 All right, it's $171,000 now let's say that our operating expenses like a good ratio, typically, like you can expect your operating expenses to be around 35% could be as low as 20% could be as high as 50% 35% is a pretty good balance. That means that you're probably about where you should be once you start getting closer to 50% something is wrong. Once you start getting closer to 20% something is wrong. Now you may be thinking, well, Tyler, if my expenses are at 20% of my gross rent, isn't that a good ratio? Yes, it is. That's obviously ideal, because for every $1 in expenses, you're making $4 the problem is that means you're probably not spending enough to maintain the property, to keep it pretty, to market, the shopping center, whatever it is, and that could come back to hurt you in the future in terms of bigger capital expenditures, longer vacancies, tenants that just may not find it all that desirable. All right, so let's run the math here. Let's say that we do have a 35% of operating expense ratio on $171,000 that gives us operating expenses. And again, these are just estimates, all right? Operating expenses of 59,008, 50, okay, which gives us a total noi, so minus 171 of 111 150 All right, that is our potential noi on this property that we are looking at. Okay, so from there, we're going to determine the stabilized value using a market cap rate. Hopefully you are keeping up with transactions in your local market, and you were able to say, well, you know, something with these types of tenants that's in, you know this condition that's probably going to go for a 7% cap rate. All right, so we all know value. The value of the property equals the NOI divided by the cap rate. So if we're going to use 111,000 and we're going to use a 7% cap rate, all right, divided by 7% that is going to give us a value divided by point oh, seven a value of 1,000,580 let's just say 1,000,005 90, for round numbers, okay, $1,590,000
Tyler Cauble 17:12
that is the value at stabilization, all right, so that is how you can kind of back into what could a property be worth at the end of the day, if I have no idea, like, if it has no income coming in now, if there's nothing for us to really base this off of, maybe I don't have any comps other than, yeah, I feel good about the 7% I feel good about the market rate. There's no other properties like this that have really sold recently. All right, so this is your stabilized valuation once you have tenants in there, once you have that income coming in, that is what it's going to be worth. Now that is not what you should pay today, right? I've seen this trap before of brokers saying, hey, once you come in here and you lease it up, it's going to be worth, you know, this at a 7% cap rate. So you should pay for that today. I know that that sounds so ridiculous, because it is, but you will see brokers all the time try and sell you the future value today, which makes absolutely no sense to me. So be very, very careful of that. All right, now, there's a couple of different ways that you could actually approach this once you have, once you have this stabilized price. And I might be getting a little bit ahead of myself, but basically, you could apply like a 75 or 80% or 70% whatever your whatever number you prefer valuation to it and say, Well, I'm only willing to pay 75% of stabilized value. That way you build in that 25% margin for yourself there, right? And we'll get to that here in a second. You have to build in a margin of risk, right? And a margin of return. Because no matter what a broker says, no matter what a seller says, if the building is vacant, it's vacant for a reason, right? I don't care what anybody says, oh, you know, you Mr. Buyer, you can come in and you can do way better than Mrs. Seller, because you'll be able to lease this up and get it to this cap rate. Okay, well, that's true. Then why didn't the seller do that? Because then they'd be able to sell it at this cap rate and make more money, right? So why wouldn't they do that if they felt very confident in just being able to get a lease? Now, sometimes there are legitimate reasons, right? Maybe they don't have the money to put in for the tenant improvements that they need to get the lease that would justify a better purchase price, right? Maybe they just don't, you know, there's, there's a number of reasons, but you want to investigate that. You want to know what that actual what that actual reason is. Okay? So we stated earlier that our goal, this is me, personally, I always aim for a two times equity multiple over five years. Okay, so again, that means if I put $100,000 into a deal, you. In five years, I better get back $200,000 okay? That is including cash flow in the deal. That is including the sale proceeds, right? That is after I've paid, you know, our, you know, closing costs. That's after I've paid brokerage costs, whatever that is, okay. Lease up. Risk is real in a vacant property. So you've got to build this margin in on the front end. Okay? And like I said, there's, there's really two different margins that you need to be thinking about. There's the the value creation margin, right? How much below the stabilized value are you able to buy it and then increase that value? Right? The other margin is your investor return margin, right? How much profit and cash flow are you going to be able to get from this over time to make it worth at least your investment metrics? Right? Again, that could be two times right. We're going to use that for the example, because that's what I underwrite. Pretty much everything at all right? Now we're going to assume right, a 25% down payment. Okay, because a lot of y'all are probably going to be coming in with about a 25% down payment. You may be able to get away with 20. Your lender may require 30, all right, but 25% is a pretty good target. Now, a big mistake that I see here is that investors will not take into account anything above and beyond the down payment. Well, that's not the only cash that you'll have out of pocket. It's very important when you are underwriting commercial deals to keep that in mind. Like, yes, you need to be prepared if you're buying a $400,000 building to bring 25% of that down $100,000 okay? That you're not going to be coming out of pocket just for 100 grand. It's going to be more than that, right? Because you're going to have closing costs, right? That's probably 1% one to 2% right? You're going to have lease up costs. Who's going to pay the brokers that are going out and finding these tenants for you, you're gonna have tenant oh my gosh, I do that every time. I've got to figure out how to adjust my pen on this because if I squeeze it too tightly, it turns on the eraser. And of course, like I don't, I just don't need that anyway. You've got your we subcu, you've got tenant improvements, right? You're you may have to come out of pocket for that, you may be able to get that looped into your construction loan. You likely will be able to, but then, even with the tenant improvements, you're still coming up with 25% of it, right? Because that is what your your your down payment is, right? That is the the amount that the bank is requiring. Now, of course, you get a renovation capex. There's all sorts of different things, like carry costs, right? Who's paying the debt service? If you don't have any tenants and you still have a mortgage, you are right. So keep that in mind as you are going through this process, okay, so if we have a stabilized value, all right, of 1.5 9 million. There we go. 1.5 9 million. Okay, we need to be all in no more than maybe 75 or 80% of the stabilized value. And there's, you know, some investors just look at it that way. Okay, if it's if the all in like value at the end of the day, when we are done with all of this work is 1,590,000 I need to be all in for 75% of that, which is 1,000,001 92 500 500 All right? That is the maximum price that I can pay, including lease up commissions, carry costs, you know, tenant improvements, everything. Okay, so that is one way, right, that 75% of stabilized value. Now, one thing that I do want to note while I'm thinking about it, you obviously want to get the seller to tell you what they want for the property, right? You don't want to just come in and say, Well, I can pay 1,000,001 92 because that seller may be willing to take 1,000,001 or a million or $900,000 and now you've just severely overpaid. All right? This just helps you understand, like, if you're going into an auction, right, maybe you're going into a commercial real estate auction. We've dealt with a few of those in the mastermind as well. Like, hey, how do I determine the maximum bid that I'm willing to pay for this, this is how you would go about doing that. All right, the maximum amount that I'm willing to pay is 1,000,001 92 so I know that going to the negotiation table. If the seller comes in and says, I want 1,000,002 for it, you go, I'll offer you 1,000,001 they counted 1,000,001 50. You're, you're $42,000 below your maximum allowable offer. All right, so you've determined anything under that purchase price is going to work, okay? So you're, you know, you can back out leasing costs. There's all sorts of different ways that you can take that. The big thing here is making sure that you're going to really, I mean, if you want to look at it a different way, let's look at it the other way, right? The second method, okay, that's the first method. The second method is, I think it's going to be worth 1,000,001 59 when we're done. All right, so let's bring this down here again. Value is 1,000,001 50 nine, all right, now I'm going to have to bring 25 I'm sorry it's 1,000,005 90. I don't know why I just did that. Now I'm going to bring 25% down. So what does that look like? Okay, well, this gets a little trickier, because you kind of have to assume what you're actually going to be dropping down as a down payment, right? So we kind of have to make assumptions on what we're actually going to pay, and then that'll help us kind of figure it out. But let's just say that we're going to bring $300,000 down, right? Maybe we get it for 1,000,002 we got to bring $300,000 down smart, or down payment equals 300,000 Well, my equity multiple at two times means that I need to get Back at the end of the day, $600,000 okay, so at that point, and this could also, this down payment could also just, here's the amount of cash that you have on hand, right? That's it. Okay, so from there, I'm actually going to say, Okay, well, I need to profit $600,000 from this. Okay, now I'm going to assume we don't have any lease up costs. I'm going to assume we don't have any construction costs. Maybe the building's in great shape, and you're going to go out and lease this yourself. If we were going to assume those costs, I would have to add that into this $600,000 number.
Tyler Cauble 27:14
Okay, so it could be 700,000 you know, etc. There's no telling. But I'm going to assume that we're just doubling our equity, right? And we just go out and sign a lease. We're going to take this 1,000,005 90, we're going to subtract $600,000 right? And that will give us our maximum allowable payment, which is basically 990 okay? $990,000 that means I'm basically bringing just under 30% or just around 30% down, and I'm able, in the next five years, to double my money. Now, again, if it was, you know, $600,000 doubles my equity, and then I've got $150,000 I'm in capital improvements. Well, then we would have to subtract 150 from this number as well, and that gives me a maximum allowable offer of $840,000 okay, so I hope this is all making sense, like there's multiple different ways for you to really die. To really dive into all of this and determine what that maximum allowable offer is really going to be. For you, the assumption of 75% of stabilized value in the first example is great because it's a lot easier to calculate those numbers. However, there's some detail that can get missed. The less math that you do, the more inaccurate you could be in the long run, right? And so that's why the second method, where we're determining what the end value is, we're taking our down payment, we're adding in the equity that we have to add to that at the end, and then we're adding any, you know, capital expenditures, leasing commissions, vacancy rates. You also have to take into account carry costs. And it's not just interest, it could be you might have to pay the utilities While there's no tenant there, all right, you subtract all of that from the end value, and that will give you the maximum purchase price that you could pay, all right? So like in this scenario, that's probably $840,000 for a building that will be worth 1,000,006 right? So we're basically having to double the value of the property in order for us to make the money that we need to, simply because of the amount of capital that we're gonna have to put into it in order to put into it in order to get it to that stabilized value. So I hope that that makes sense. It's, it's, you know, if not, please go back and watch. And if it still doesn't click, leave me a comment in the video below, and I'll go, you know, deeper into value on it. But that is how I would determine my maximum allowable. Offer, especially if there's no cops, and you're really trying to do this on your own, right? Again, you're taking that stabilized value. You're taking your desired margin, what you need to make, and then which is your required return, and your reverse engineering into what your maximum allowable offer is. Now that doesn't mean that's the purchase price that you should offer, right? That's the maximum allowable purchase price that you could pay for this deal to still make sense for you. Okay, let's get to some of y'all's comments here real quick, because I know I have been in my whiteboard for quite some time, and now looking at these cherry is saying, lovely. Love this detail, Tyler, it's great refresher, and you explain it so well. Absolutely, cherry, glad you're here. I'm glad you're enjoying us. Kimberly is saying, Tyler, can you speak more about what to assume on TI and lease up costs? Absolutely Okay, so let's, let's look at what that would, what that would be, because couple different ways to determine that, right? I mean, we looked at here and we basically said that our net operating income going back is, is going to be roughly $180,000 right? That's our gross net, you know, gross operating income, okay? Because we subtracted vacancy after that, well, that $180,000 is going to be what we're paying commissions on. Okay, so let's assume that we sign a five year lease. So it's $180,000 and base rent per year. Okay, let's assume we sign a five year lease. Okay? Now, this is a very simplified version of this, okay, so 180,000 times five gives us a $900,000 total lease value, all right. Now in most cases, like, unless you're dealing with like, $1 General that's gonna have five years flat, and then five years at, you know, a 10% bump. This is actually going to increase at 3% per year, right? So it'd be 180,000 the first year, it would be, let's see, 185,400 the second year, it would be 190,962 the third year, and so on and so forth. So you would have to take into account the the annual increases, all right, but just for very simple math purposes, we're gonna say we've got a $900,000 lease, and you're probably going to be paying 6% in commissions on that All right, so 900,000 times 6% gives us $54,000 in leasing commissions. Okay, so you'll want to, you want to bring the $54,000 to the table so you have that or just be prepared to be spending $54,000 when you get the lease done. Okay? Now it gets far more nuanced when we get into the tenant improvements. All right. So Ryan had this really awesome spreadsheet last night where he said, Okay, I'm going to assume you know, at $12 a foot triple net, right? If that's market rate, 12 to 16 bucks a foot triple net, here's what I would have to pay if I've got $30 in tenant improvements. Here's what I would have to pay if it was $25 $20 1510, five, zero in tenant improvements. Okay, if you're going for 12 to $16 a foot in rent, right? Typically, you're going to want to see somewhere, so let's say 12 to 16 per square foot rent, all right, more often than not, you'll see the equivalent in TI, depending on the condition of the property, right, 12 to $16 per square foot in TI. Now, if it's second generation, you might be able to get $16 a foot in rent and $12 a foot in TI. Okay, if it's a vanilla box. Maybe it's, maybe it's a dark shell. You know, you might be getting, you might have to double your rent costs, all right, so let's say, you know, instead of 12 to 16 bucks in TI, you might be looking at closer to, like, $24 a foot to, you know, 30 to $2 a foot in TI, right? Because you're, you're having to build bathrooms, right? That's a fixture that's going to stay with the property. There's a lot that can go into that. Now, there are a couple different ways for you to actually manipulate this. You know, maybe you go to market and you say. A this space is $12 a foot with no ti All right, none, but a tenant comes to you and says, Hey, Tyler, I want you know new paint and carpet. Okay, great. That'll cost $10 a square foot. What I'm going to do is, I'm actually going to pull out my calculator. Here.
Tyler Cauble 35:30
My my 10 b2 calculator. All right, this is how we calculate this. You treat it like a loan. Let's say it's $10 a square foot on, you know, 5000 square feet, all right? So it's $50,000 that's your principal value. I'm going to amortize it at 8% over the length of the lease, which is 60 months. Okay? That gives me an additional monthly payment of $1,000 per month. So I could actually go back to the tenant and say, Yeah, I will give you the TI that you're requesting, but we're going to add $1,000 a month to the lease, all right, which, if you end up running the math, you know, roughly $1,000 a month Times 60 months, you're making basically $10,000 on a $50,000 investment, right? So, I mean, that's a pretty good return that is worth that is a 20% return on just that money alone. That's worth doing. So that's how sometimes it can actually be very much in your favor to do the tenant improvements than not, but it depends on how you decide to actually bake it into your lease. Okay, Ryan's jumping in. Ryan, good to see you in here. Man. He's saying awesome stuff. Thanks for going over this. Tyler, my original Mao was way above what it should have been. Yeah, absolutely. I mean, it's, it's very important to take into account the risk, right, that we're taking as investors. You know? I mean, of course, sellers are going to try and maximize the price that they can get right. Of course, they're going to go for the highest amount of money that they could possibly get without with doing the least amount of work. We don't want to pay them for tomorrow's value today, because we have to come in. We have to do that work. We have to take the construction risk. What happens if I tear open this wall and the electrical is from 1940 and has no sleeves on it, and it's a fire hazard, and now I have to completely redo all the electrical. Ask me how I know that it was cost me $180,000 on a deal that we recently did, but that's why you have contingency in your construction costs. All right, you just never know what if the property sits vacant for six months longer than everybody thinks that it's going to you've got to bake that risk in on the front end. Hopefully this was very helpful for you guys. Appreciate you all joining me. If you enjoy this kind of stuff, like and subscribe to the channel. This is Office Hours. This is what we were doing every Tuesday morning, 8:30am Central Standard Time. I'm going live teaching you guys something, answering your questions about commercial real estate, whatever you've got. We've got a hotel opening up here pretty soon. I'm really excited for it. March 23 salt ranch will be open if you are coming to Nashville this year, if it's after March 23 2026 Hey, book a room at Salt ranch. We'd love to host you. It's gonna be a lot of fun. Can't wait to have a grand opening there this spring. I'm actually gonna be renting it out and having our wedding celebration there, which will be really cool. So that's all I have on personal updates for today. We're still working on the Self Storage Facility. We still have a lot of things going on, but we are over time, I've got to run appreciate you all, and I will see you next week. This
Tyler Cauble 38:51
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