A commercial acquisition starts with a question: what cash flow and obligations are you buying? Build your review from source documents and clearly separate actual operations, seller projections, and your own assumptions.
Reconstruct the income
Request the rent roll, executed leases and amendments, collections history, operating statements, current tax information, and service contracts. Reconcile contractual rent with actual receipts. Identify concessions, arrears, upcoming expirations, options, and any income that depends on a future lease.
Net operating income is operating income less property operating expenses, before financing and income taxes. Check each calculation’s treatment of management, reserves, nonrecurring costs, and reimbursements. A capitalization rate only helps comparison when the income definitions are consistent.
Review obligations tenant by tenant
- Rent schedule, security, guarantees, and outstanding landlord work.
- Expense recovery, caps, exclusions, and reconciliation history.
- Renewal, termination, purchase, exclusivity, and co-tenancy provisions.
- Assignments, subleases, notices, and any unresolved disputes.
Budget for the physical property
Use qualified specialists for the scope the property needs: condition assessment, environmental review, roof and systems, accessibility, title, survey, and land-use questions. Ask what must be repaired immediately and what is likely during your hold period. Allocate a reserve instead of treating every dollar of operating income as distributable.
Run more than one scenario
Model downtime at lease rollover, tenant improvements, leasing costs, operating expense growth, and financing terms. Compare a base case with a weaker case that takes longer to lease and costs more to improve. Label assumptions rather than presenting a projected return as a promised result.
If a tax-deferred exchange is part of the acquisition, involve your tax adviser before the sale. Our 1031 exchange introduction points to the IRS requirements and the questions to take to your advisers.