Sizing a deal in commercial real estate involves determining its financial viability and overall value. Here’s a step-by-step approach:
1. Define the Objectives
• Determine the purpose: Is it for investment, development, or owner-occupation?
• Establish key performance indicators (KPIs): ROI, cash flow, or appreciation.
2. Evaluate the Property
• Type of Asset: Office, retail, industrial, multifamily, etc.
• Location: Proximity to infrastructure, demand, and demographics.
• Condition: Physical state, required improvements, and compliance with regulations.
3. Determine the Purchase Price
• Market Analysis: Compare recent sales of similar properties (comps).
• Appraisal Value: Professional appraisal for an accurate assessment.
4. Analyze Income Potential
• Net Operating Income (NOI):
• Evaluate current and projected rent rolls.
• Consider market vacancy rates and leasing terms.
5. Calculate Key Metrics
• Cap Rate:
• Cash-on-Cash Return:
• Debt Service Coverage Ratio (DSCR):
6. Financing Analysis
• Identify loan terms: interest rates, loan-to-value (LTV) ratio, and amortization period.
• Assess whether the property’s cash flow covers debt obligations.
7. Project Capital Expenditures (CapEx)
• Account for repairs, upgrades, or redevelopment costs.
• Include these in financial projections.
8. Conduct a Sensitivity Analysis
• Model scenarios for changes in interest rates, vacancy rates, or operating costs.
• Assess risks and build contingency plans.
9. Consider Tax Implications
• Analyze potential tax benefits (depreciation, deductions).
• Estimate property taxes.
10. Final Due Diligence
• Confirm zoning laws, environmental assessments, and legal clearances.
• Review tenant leases and contracts.
11. Evaluate Exit Strategies
• Resale potential, anticipated appreciation, or holding period profitability.
Example
• Property Price: $5,000,000
• NOI: $400,000
• Cap Rate:
• Loan Details: 75% LTV, 6% interest, 20-year amortization.
• Debt Service: ~$323,000/year.
• DSCR:
This would be a viable deal if it meets your financial goals and risk tolerance.
Let me know if you’d like help with any specific calculations!