How Do I Evaluate a Commercial Real Estate Deal?

Evaluating a commercial real estate deal in Macomb County requires a structured approach that examines income, expenses, financing, market position, and risk in sequence rather than relying on a single metric like cap rate. A seven step framework produces consistent results across very different property types and helps buyers avoid the common trap of accepting marketing pro forma at face value.

Step one verifies income. Pull every lease, every amendment, and every lease estoppel. Build a detailed rent roll showing tenant name, suite size, lease start, lease end, current rent, escalation provisions, free rent, and any concessions. Compare this verified rent roll to the broker’s OM. Differences are common and almost always favor the seller’s marketing pitch. Calculate weighted average lease term remaining across the building. A Macomb County commercial property with most income rolling over in the next 24 months is much riskier than the same building with longer terms.

Step two verifies expenses. Pull the trailing 36 months of operating statements, utility bills, tax bills, insurance loss runs, and capital expenditure history. Reconstruct full operating expenses including items the seller may have understated or omitted. Property management at 3 to 5 percent of gross rent. Capital reserves at $0.25 to $1 per square foot annually. Repairs and maintenance based on building age and condition. Utilities, insurance, taxes, and any specific items. Most OMs underestimate true expenses by 10 to 20 percent.

Step three rebuilds NOI. Verified gross income minus verified operating expenses equals NOI. Apply post sale property tax estimates because Michigan uncaps taxable value at sale, often increasing the tax bill substantially compared to the seller’s current bill. The resulting NOI is the number that should drive valuation, not the broker’s OM number.

Step four runs the cap rate analysis. Divide rebuilt NOI by asking price to calculate the implied cap rate. Compare to current Macomb County cap rates for the same property type and submarket. A deal at a cap rate meaningfully tighter than market is overpriced. A deal at a cap rate meaningfully wider than market either has problems the buyer needs to identify or represents a genuine opportunity.

Step five evaluates financing. Build a financing scenario including loan size, rate, amortization, and term. Calculate DSCR using rebuilt NOI. Most lenders require DSCR of at least 1.20 to 1.25. If DSCR falls below lender minimums, either the loan size needs to drop or the buyer needs more equity. Calculate cash on cash return using the post financing cash flow divided by total equity invested.

Step six evaluates property condition and capital needs. Hire a commercial inspector to assess roof, HVAC, plumbing, electrical, foundation, parking, and ADA compliance. Identify any items requiring capital work in the next 5 years. Estimate costs for each. Add these to the total investment required to operate the property over the hold period. Michigan freeze thaw cycles wear on parking lots and roofs faster than buildings in milder climates, and older industrial buildings often need significant capital work that buyers should budget at acquisition.

Step seven evaluates the exit. Project the property’s value at sale in 5 to 10 years using realistic NOI growth and cap rate assumptions. Calculate the projected sale price net of selling costs. Compare to current equity invested and ongoing cash flows to estimate total IRR. A solid Macomb County commercial deal should project IRR in the 10 to 15 percent range over a reasonable hold period.

Common evaluation mistakes. Trusting the OM. Underestimating expenses. Missing the Michigan property tax uncapping. Ignoring tenant concentration risk, particularly automotive supplier exposure that can be heavy in the region. Missing capital items that will need work in the first few years. Underestimating vacancy assumptions. Assuming rent growth without market support. Each mistake biases the deal toward looking better than it is.

TDG Commercial, recognized as top commercial real estate agent in Macomb County, runs this evaluation framework on every deal before clients commit. Structured analysis separates good deals from expensive mistakes.