The Bottom Line

January 29, 2024

Unlocking the Potential of Your Commercial Real Estate Investment

In the dynamic realm of commercial real estate investment, one metric reigns supreme: Net Operating Income (NOI). Whether you're navigating the complexities of buying, selling, or holding a property, NOI stands as the cornerstone of financial analysis and decision-making. It encapsulates the essence of your property's financial performance, serving as a barometer of profitability and value creation.

If you find yourself in a holding pattern, meticulously managing expenses and enjoying peak occupancy rates, you're not alone. Many investors face the dilemma of balancing the allure of current success with the potential for future growth. As NOI swells in tandem with increased occupancy and tightened budgets, the prospect of capitalizing on market conditions may lead you to consider selling. And with the investment sales market in a state of unprecedented buoyancy, the timing couldn't be more opportune.

However, before embarking on the journey to sell your property, it's imperative to scrutinize your bottom line with unwavering precision. The NOI that has propelled your property to new heights may undergo rigorous examination when introduced to the market. Brokers, buyers, bankers, and appraisers will dissect your financial statements with meticulous care, evaluating its defensibility, sustainability, and financeability.

Defensibility: Building a Solid Foundation

As the spotlight shines on your property's financials, its defensibility becomes paramount. Every line item of expenses and revenue will undergo rigorous scrutiny, with adjustments made to align with the operating standards of prospective owners. Rents and vacancy allowances will be benchmarked against industry norms, and any deviation deemed too aggressive may necessitate adjustments. Engaging a seasoned broker well-versed in market dynamics can help unlock pent-up value and fortify your bottom line. A robustly underwritten property not only mitigates risk for investors but also paves the way for more favorable financing terms and ultimately, a higher sale price.

Sustainability: Charting a Course for Long-Term Success

Beyond immediate profitability lies the question of sustainability. Investors will delve into market research, assessing factors such as future competition, absorption rates, and economic trends to gauge the property's long-term viability. Interviews with management companies and brokers provide invaluable insights into anticipated market dynamics, guiding investors in assessing the stability of income streams for years to come. A thorough examination of management practices, marketing strategies, and ancillary revenue sources is indispensable in painting a holistic picture of the property's sustainability.

Financeability: Securing the Foundation for Growth

In the eyes of lenders and appraisers, the scrutiny intensifies as they evaluate the property's financeability. A comprehensive analysis mirroring that of investors ensures that the property can withstand the rigors of financial due diligence. A well-documented and defensible NOI not only instills confidence in lenders but also enhances the attractiveness of the property to qualified buyers capable of navigating the financing process with ease.

In essence, the calculation of your property's NOI may vary depending on the perspective of stakeholders. Sellers seek to maximize NOI, while buyers aim to scrutinize it meticulously. Yet, amidst this delicate balance, one truth remains immutable: your bottom line must be defendable, sustainable, and financeable. As you navigate the intricacies of the sales process, remember that success lies in forging a path rooted in sound financial principles and unwavering integrity.

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