Simulation: a fictional property for practice.

A $1.8 million retail strip: whose income do you trust?

A six-unit retail strip is priced at a 7.5% cap rate on the seller’s pro forma. Check the real income before you value it.

A fictional retail strip center bought from a private seller through a commercial broker.

• Asking price: $1,800,000
• Seller’s pro forma NOI: $135,000 a year (7.5% cap rate)
• Last 12 months, actual NOI: $112,000 a year
• Leases: Two tenants are month-to-month; one lease ends in 4 months

Mission 1: Which income do you value?

Which NOI should you use to value the property?

• The actual last-12-months NOI, checked against the leases
• The seller’s pro forma, since that’s what the broker advertises

Value = NOI ÷ cap rate. At the same 7.5% cap rate the asking price implies, the actual $112,000 points to about $1,493,000, not $1,800,000. Next, ask a commercial broker or appraiser to support a cap rate from comparable sales and this property’s tenant, lease and condition risks.

Mission 2: Is the rent roll real?

How do you confirm what the tenants actually pay and owe? Pick all that apply.

• Read every lease, not just the rent roll summary
• Get estoppel certificates: each tenant confirms its rent, deposit, lease term and any claims
• Trust the broker’s marketing summary

Check which leases are triple-net (tenants pay most taxes, insurance and maintenance) and which aren’t: it changes your expenses a lot.

Mission 3: The lease risk

• Value on actual NOI, at the same 7.5% cap rate the asking price implies: About $1,493,000
• Asking price: $1,800,000
• Gap: About $307,000 of value at the assumed 7.5% cap rate, from $23,000 a year of income that isn’t there
• Tenants who could leave within months: Three of six

With half the tenants able to leave soon, even the actual NOI isn’t secure. Price in vacancy, leasing costs and months to re-lease.

At $1,800,000, what do you do?

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.