How to find office buildings and how much to pay for one

How do I find office buildings for sale?

It is very rare to find a "For Sale" sign in the front lawn of an office building. It tends to scare the existing tenants and deter new tenants. You will have to work with a real estate broker, or ask around in the brokerage community regarding properties for sale. Many more owners would be willing to sell if someone made them an offer. They do no advertising, though, and do not have the property listed with any broker. You will have to find these motivated owners on your own. The best way is to look for properties with high vacancies, but in good buildings with good locations. The high vacancies are probably a management problem. You may find a very motivated owner.

The current tenants might be able to give you contact information for the owner or the management company. If that does not work, the local tax assessor's office can tell you the name of the legal owner and the address where the tax bills are sent. Bear in mind that a management company is not motivated to pass along information about potential buyers. If the current owner sells the property, the management company might lose an account. If you do not hear back from the management company after several attempts at contacting them, find another route for identifying the owner.

What is a fair price to pay for an office building?

The typical way to evaluate a purchase price for an office building is the Net Operating Income (NOI) and cap rate method. The current owner will usually want a sales price based on what the rental income would be if only the property were managed better and had more tenants at higher rates. You will want to buy based on today's dreadful picture, with your upside potential based on improving occupancies and perhaps reducing prices.You are going to agree on a price somewhere between those two. The magic number will depend on your relative motivations and negotiating skills.

What due diligence is specific to office buildings?

This is not comprehensive, but here is a checklist of things to investigate when buying a small office building.

Read all leases.
Obtain an owner statement, in writing, that there are no other written or oral agreements.
Review tenant payment histories over at least the past two years.
Read all tenant correspondence files, looking especially for recurring complaints.
Examine maintenance records for at least two years.
Ask for copies of all maintenance contracts currently in place, and any canceled within the last year.
Obtain property tax notices for the last three years.
Review insurance policies and ask for permission to obtain copies of any claims from the insurance company.
Visit often over the course of several days. Are there any parking or loading issues? Does the inside temperature seem to be well regulated? Does the elevator work? What goes on during the day? Are there any sewer smells in the bathrooms or hallways?
Visit at night. Do the exterior lights come on? Does the property appear safe?
Visit when it rains. Where does the water go? Does it exit the property in an appropriate manner, or are there water issues?
Is the property in compliance with the Americans With Disabilities Act? Most bookstores will sell you, or public interest groups will give you, small books and pamphlets with general guidelines. The United States Department of Justice has a good FAQ site. It covers employment issues as well as property requirements.
Enter all office spaces, preferably after hours and with the owner, to perform a physical inspection. You will still need the services of a professional property inspector.Your visit is to evaluate the quality of tenants, and to see if any problems leap out at you so you do not have to spend the money on an inspector. Stained ceiling tiles, for example, are a sure sign of roof or HVAC problems. A high proportion of space heaters is another sign to look for; you will find them underneath desks, even in the summertime. Large numbers of space heaters mean inefficient heating and a high drain on the electrical system with possible overload problems.
Find out if anything makes that property less competitive than others. Local government lines can meander all over the place. Is your building in some jurisdiction that charges an employment tax for all workers in that building? Is there a rental tax placed on landlords?

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