Appraisal Value

[chrisg]

We are currently in contract to purchase a 4 bay ss with 1 IBA on about 1 acre of land for $465k. We are doing a conventional loan. The appraisal came back and the bank is saying the property values at $370k, but they can do an equipment loan for $95k to meet the "expected value" for the purchase. Is this normal in commercial? Or is the bank just trying to find a way to keep the deal alive? The equipment loan will increase our monthly payment by $400/month.

 

[Rfreeman]

Thats the bank trying to keep the deal alive. It's that or you bring that much more to the table to cover the difference.

If I was you I would re look at this deal to see you if it makes sense as is, not what you think you can do to improve this or that but what your buying now.

 

[Roz]

Sounds like the financials do not support the original ask/offer. Check your cash flow numbers as it is odd for the difference to be 30%. Read the bank appraisal to see where you differ from the bank.

 

[Keno]

Both are correct, you have to buy the property for what it is worth right now, not after your potential increase - the increase in cash flow and value is your reward for the risk and work put into turning around a property.

If the appraisal came in that low, sounds like its time to get a credit on the purchase price. Most CRE value comes from the cash flow it produces. Is the cash flow not producing enough to justify the contract price? Are you working with a seasoned Commercial RE professional? Based on your question it seems you are not seasoned in CRE, if that is the case you need someone who is to guide you through the deal.

Also, make sure you can make the monthly expenses with a healthy margin at the current business level - again don't count on the increase in these calculations. The bank and utilities expect their money on time every month, no questions - they will not be there to help you if something is miscalculated in your due diligence. The buck stops with you, so make sure the numbers work before jumping into the deal.

I have been in CRE both as a lender and investor for many years, and it is not an area you want to DIY learn as you go. You need someone with experience guiding you, even small misteps can have huge consequences. Not trying to scare you, but CRE is not a place to just wing it as you go.

 

[chrisg]

Both are correct, you have to buy the property for what it is worth right now, not after your potential increase - the increase in cash flow and value is your reward for the risk and work put into turning around a property.

If the appraisal came in that low, sounds like its time to get a credit on the purchase price. Most CRE value comes from the cash flow it produces. Is the cash flow not producing enough to justify the contract price? Are you working with a seasoned Commercial RE professional? Based on your question it seems you are not seasoned in CRE, if that is the case you need someone who is to guide you through the deal.

Also, make sure you can make the monthly expenses with a healthy margin at the current business level - again don't count on the increase in these calculations. The bank and utilities expect their money on time every month, no questions - they will not be there to help you if something is miscalculated in your due diligence. The buck stops with you, so make sure the numbers work before jumping into the deal.

I have been in CRE both as a lender and investor for many years, and it is not an area you want to DIY learn as you go. You need someone with experience guiding you, even small misteps can have huge consequences. Not trying to scare you, but CRE is not a place to just wing it as you go.

Hi Keno, you are correct in that we are not seasoned in CRE. My wife is a broker and so we are buying this ourselves. The NOI ranges over the last 3 years between $30k-$50k. The owners say they take out some of the cash to pay for other things so it isn't all reported. They estimate about another $30k or so.

The lender hasn't given us the appraisal yet either, which we thought was odd. We paid for it. His response was that they typically do not give out the appraisal report until closing or after closing. This lender situation just didn't feel right to us.

 

[Keno]

Hi Keno, you are correct in that we are not seasoned in CRE. My wife is a broker and so we are buying this ourselves. The NOI ranges over the last 3 years between $30k-$50k. The owners say they take out some of the cash to pay for other things so it isn't all reported. They estimate about another $30k or so.

The lender hasn't given us the appraisal yet either, which we thought was odd. We paid for it. His response was that they typically do not give out the appraisal report until closing or after closing. This lender situation just didn't feel right to us.

What kind of broker is your wife? CRE? CRE 101 - if the appraisal comes in lower than the contract price, negotiations should be started on a price credit. You really need someone with CRE experience in your corner(maybe your wife can partner with an experienced CRE broker and split the commission).

Those NOIs don't add up to the contract price you have agreed to. Your working at a 9.3 multiple at best to 15.5 multiple at worst on reported NOI. Cash the owners have taken out is not verifiable and thus is not factored into the sale price. They didn't report the cash and that is their reward, they can't then expect to have that unreported and unverifiable income counted towards the sale price. Tax return income is what counts, if those look fishy, ask to see the IRS tax transcripts. Remember this is a business transaction and should be treated as such. Everything the sellers tell you has to be verified.

Also, are you going to be able to cover the debt service and have an acceptable return on your money afterwards? A rough calculation would put your debt service on that contract price loan between $25-30k a year or more depending on your int rate, which would come directly out of that NOI.

Is the lender a bank or a secondary market lender? I have never had any issues getting appraisals from the lender for review before closing, as you said you paid for it. You need to see it and study it - most good appraisers will include their opinion on the location, area, and future of the area. How much did the RE value at vs how much did the biz value at?

Again, not trying to scare or deter you. This saying holds true always - its better not to have a deal than to have a bad deal! A lot of people will try to push a deal through because they have so much time and money into it already. If the deal doesn't make sense as you dig further into it, don't be afraid to cut bait and walk away to fish for another deal. Getting a bad deal as the economy turns south might be one of the worst combinations.

 

[Rfreeman]

Your over paying.....for a second non paying job because at those numbers every penny will be servicing your debt. Owners are crazy to take that much out and want it to count when they sell. I would run away from this deal....hopefully you used the clause in your CRE transaction that if the property doesn't appraise you can get out and recoup your earnest money.

 

[OurTown]

What kind of broker is your wife? CRE? CRE 101 - if the appraisal comes in lower than the contract price, negotiations should be started on a price credit. You really need someone with CRE experience in your corner(maybe your wife can partner with an experienced CRE broker and split the commission).

Those NOIs don't add up to the contract price you have agreed to. Your working at a 9.3 multiple at best to 15.5 multiple at worst on reported NOI. Cash the owners have taken out is not verifiable and thus is not factored into the sale price. They didn't report the cash and that is their reward, they can't then expect to have that unreported and unverifiable income counted towards the sale price. Tax return income is what counts, if those look fishy, ask to see the IRS tax transcripts. Remember this is a business transaction and should be treated as such. Everything the sellers tell you has to be verified.

Also, are you going to be able to cover the debt service and have an acceptable return on your money afterwards? A rough calculation would put your debt service on that contract price loan between $25-30k a year or more depending on your int rate, which would come directly out of that NOI.

Is the lender a bank or a secondary market lender? I have never had any issues getting appraisals from the lender for review before closing, as you said you paid for it. You need to see it and study it - most good appraisers will include their opinion on the location, area, and future of the area. How much did the RE value at vs how much did the biz value at?

Again, not trying to scare or deter you. This saying holds true always - its better not to have a deal than to have a bad deal! A lot of people will try to push a deal through because they have so much time and money into it already. If the deal doesn't make sense as you dig further into it, don't be afraid to cut bait and walk away to fish for another deal. Getting a bad deal as the economy turns south might be one of the worst combinations.

I pretty much agree with every word except the multiplier. Around here 10 times NOI is about the floor for washes and it easily goes up to 15. I know one that sold two years ago that was about 17 times NOI and it needed a lot of work. Actually the previous owner did all the work so when you put labor cost on it there was a negative cash flow. For the risk involved in owning a wash my opinion is that most are going too high around here. I see an okay deal here or there but nothing that gets me too excited.

 

[Dan kamsickas]

Hi Keno, you are correct in that we are not seasoned in CRE. My wife is a broker and so we are buying this ourselves. The NOI ranges over the last 3 years between $30k-$50k. The owners say they take out some of the cash to pay for other things so it isn't all reported. They estimate about another $30k or so.

The lender hasn't given us the appraisal yet either, which we thought was odd. We paid for it. His response was that they typically do not give out the appraisal report until closing or after closing. This lender situation just didn't feel right to us.

Nope. Only buy on what they can confirm. That $30K or so was their profit. They can't have their cake and eat it too. They took $30K (most likely tax free) and now want to profit from that skim. I would rather walk from the deal than take their word for it.

 

[Roz]

I pretty much agree with every word except the multiplier. Around here 10 times NOI is about the floor for washes and it easily goes up to 15. I know one that sold two years ago that was about 17 times NOI and it needed a lot of work. Actually the previous owner did all the work so when you put labor cost on it there was a negative cash flow. For the risk involved in owning a wash my opinion is that most are going too high around here. I see an okay deal here or there but nothing that gets me too excited.

WOW, I would take 10-15 NOI and run to the bank & retire. Multiples are funny things, not an exact science. If you have $$20K-30K NOI but the commercial land is valued at $300K based on comps you have your 10x-15x multiple. Definitely not the norm and a bit misleading. At the end of the day you are buying a cash flow and need to determine what that cash flow is worth to you as the buyer. Car washes are unique businesses (in both good and not so good ways), and not many are available for sale which sometimes influences a sale price.

 

[OurTown]

I have seen a few that sold for 8-9 times NOI. Many times I don't get to see the net.

 

[OurTown]

WOW, I would take 10-15 NOI and run to the bank & retire. Multiples are funny things, not an exact science. If you have $$20K-30K NOI but the commercial land is valued at $300K based on comps you have your 10x-15x multiple. Definitely not the norm and a bit misleading. At the end of the day you are buying a cash flow and need to determine what that cash flow is worth to you as the buyer. Car washes are unique businesses (in both good and not so good ways), and not many are available for sale which sometimes influences a sale price.

What NOI multiples do you see around your area?

 

[99Roadking]

We are currently in contract to purchase a 4 bay ss with 1 IBA on about 1 acre of land for $465k. We are doing a conventional loan. The appraisal came back and the bank is saying the property values at $370k, but they can do an equipment loan for $95k to meet the "expected value" for the purchase. Is this normal in commercial? Or is the bank just trying to find a way to keep the deal alive? The equipment loan will increase our monthly payment by $400/month.

It is quite possible that the lender doesn't want to combine the land and building loan with the equipment loan.This way if you were to be foreclosed on they could get the equipment out of the building to recoup some of their money. We actually have two LLC's at our location. Harper's Investments LLC owns the structure. the land and the parking lot and Wash Me! Auto Wash owns the equipment and the actual car wash business. Wash Me! pays Harper's $2500.00 per month for rental. It works out very good for us. I said that to see if you could do the same and borrow under 2 LLC's. Just a thought and a good accountant can't help you more than I can. Good luck

 

[Roz]

It is quite possible that the lender doesn't want to combine the land and building loan with the equipment loan.This way if you were to be foreclosed on they could get the equipment out of the building to recoup some of their money. We actually have two LLC's at our location. Harper's Investments LLC owns the structure. the land and the parking lot and Wash Me! Auto Wash owns the equipment and the actual car wash business. Wash Me! pays Harper's $2500.00 per month for rental. It works out very good for us. I said that to see if you could do the same and borrow under 2 LLC's. Just a thought and a good accountant can't help you more than I can. Good luck

We have two LLCs structured like you to limit risk and liability. Unless you are going to try to sell the business without the property (very hard to do) I do not see the benefit of paying rent as you file everything on a Schedule C personal income tax form. What am I overlooking?

 

[Joswhaha]

I'm not a tax professional and this isnt tax advice but how it has been explained to me is: Rental Income is generally considered passive income and not subject to Self Employment Tax. Probably depends on the individuals situation, on what makes the most sense. Business income is filed on a schedule C and Rental Income is filed on a schedule E.

 

[Roz]

Ah. Makes sense.

 

[Keno]

Joswhaha is correct. Also, no rent transaction could negate your LLC liability protection you are seeking with 2 LLCs. The court could find that you are actually operating as one company since their is no formal rent, and a real landlord wouldn't allow a $0 rent. Piercing the corporate veil.

I am not a lawyer or accountant, just experienced in CRE. So take it for what you want.

 

[Keno]

To take it a step further. Rent should be in line and provable to market rent. This is to avoid issues with the IRS for converting ordinary income to passive at a greater rate than market rent, and to avoid issues with the aforementioned LLC protection

 

[Keno]

There should also be a formal rental agreement on paper in place and on file

 

[Kar B Kleen]

To take it a step further. Rent should be in line and provable to market rent. This is to avoid issues with the IRS for converting ordinary income to passive at a greater rate than market rent, and to avoid issues with the aforementioned LLC protection

Let me take it a step further and suggest the property owner also owns the wash equipment thus increasing the monthly rent since it includes property and equipment rental per month.