HOW TO MAKE AN OFFER ON COMMERCIAL REAL ESTATE

Four phases of making an offer on a commercial property, which are different

perspectives of looking at the deal:

1. Broker
2. Seller Financials
3. Performa Projected
4. Your offer (your numbers)

On the other axis we will find eight essential things which must be taken into account:

1. Income
2. Expenses
3. NOI
4. Mortgage
5. Cash Flow
6. COC (Cash on Cash) Return
7. Cap Rate
8. Cap Exp

And how do you combine both the four phases with the eight essential concepts?

1. Broker

This is an introduction to the deal. The purpose of it is to inspire emotion, and the more
emotion involved the less intelligence.

The more phases we pass, the more believable and trustful the deal is. We believe more
the seller than the broker, but we also have more trust in our own offer rather than in the
seller’s offer.

2. Seller’s Financial

It is an interesting document to know how the seller has been performing on the
property. His objective is to make the numbers more attractive, so we must have more
trust in our numbers rather than in the seller’s numbers.

3. Performa

This research comes from you. You need a target, something to reach for. It will help
you decide on a precise extra strategy.

4. Offer

Your offer must be based on your own perspective, statistics, research and beliefs.
Goals in your deals:

- You want your Cash Flow to be positive

- Cash on Cash Return should at least be two digits
- It must have Upside Potential (ability reduce expenses, ability to charge back for
utilities, etc). Your performa will tell you have much upside potential the deal has.
- It must be an stable and growing neighbourhood.

Now we pass to the essential concepts:

1. Income

My concern is not what the broker, seller or performa says, but what is eventually being
collected.

2. Expenses

We can’t underestimate expenses, perhaps get a proper manager.

3. NOI

Your NOI should be based on the Income and Expenses.

4. Mortgage

Get 2 lender reviews to look at your deal and give you there mortgage terms in order to
figure out which the Cash Flow should be.

5. Cash Flow

If this one does not excite you either have to do a better offer or forget about the deal.

6. COC Return

Search for a double digit return.

7. Cap Rate

These ones are market-dependant. Your offer cap rate has to be higher than the market
cap rate.

8. Cap Expenses

Get contractor quotes on what’s needed under property. Only believe what the
contractor gives you.

Now the question is: Is the offer still worth it?