6 Ways to Analyse the Gross Income for a Commercial Real Estate Sale

When you look at a commercial real estate property for the first time the gross income may be large and attractive, but the net income will be far more important as part of the analysis. Somewhere between the two will be the costs to run the property.  The outgoings are those critical costs to analyse.  You need to understand the averages that apply to outgoings in the local area for that property type.  You can relate those averages to the listing that you are about to take to the market.

So an outgoings analysis is required as part of preparing a commercial, industrial, or retail property for sale.  The same can be said from a leasing perspective but for different reasons.  The attractiveness of the property will be driven from the expenses to run it.  A costly property will be unattractive to both buyers and tenants.  These problems need to be fixed or understood before the marketing campaign commences.

Certainly some properties can be so unique that the outgoings should be similarly regarded.  That would be the case where the property creates circumstances of use and occupancy beyond the averages.  If you have a reason for the high outgoings, and the reason is geared to location and property use, then you may be able to continue with the marketing process.  Understand how the outgoings will reflect in the net income and therefore the attractiveness of the property.

It may be that the operating costs for the property are beyond the averages and on that basis need controlled and rectification.  A top agent will know how to analyse the property operating costs to see the challenges that lie within.

To do an operating cost analysis for a property, here are some ideas to help you:

  1. Most quality properties will have some form of budget relating to operating costs.  Those budgets will be based on history and property usage.  Get a copy of the outgoings reconciliation for the last two years.  Also get a copy of the outgoings performance for the current year against budget.  You can analyse both against each other.
  2. Understand the special factors that are unique to the property and that may have an inflating factor in the operating costs budget.  Are those special factors critical to the daily function of the asset?
  3. Split off the statutory charges that apply to the operating costs.  Those statutory charges should be based on property value and rating charges.  Compare those amounts to similar properties in the local area.
  4. Look at the consumable property costs such as water rates, and energy costs.  Are they both well managed?  Can savings be generated from occupancy initiatives?
  5. Look at the special categories within the outgoings such as security, air conditioning, lifts, escalators, cleaning, repairs and maintenance, and insurances.  Compare those separately categories to similar buildings in the same general location.  Look for any discrepancies or high charges in the comparison.

When you really understand the costs that apply to running the property you can see where the net income can be improved.  That will then help lift the potential price for the property and the leasing opportunities.

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