Apartment Shell Valuation

I have a zoned 10 unit apartment building I’m looking to grab but it is a shell and I’m not sure how to valuate it. It is one of 15 units, 9 owners total. One owner owns eight buildings and their rents go from $1600 for a three br, $1200 for two br and 900 for a one br. Should I use this as a guide to place valuation including operating expenses and taxes minus purchase price, carry costs and build out expenses? Two exits I have in mind is wholesaling it or fix and flip.

If you have to ask this question, you should not buy it. It’s too complicated. You need permits and have to have the work reviewed by city building inspectors and you have to have a lot of the work done by licensed contractors and they’ll take you to the cleaners. Unless you’ve done it before and have experience with what’s involved, you’ll go broke before you get it ready for renting and rented. If you don’t believe me, phone a couple local construction companies to get a quote to do all the work with permits. I’m willing to bet the cost is a lot more than you thought it is.

Completing a “shell” building is a challenge.
MANY unseen expenses involved. We just got done with Due Diligence on a 48 unit condo shell, and another 25,000sf office space.

Using neighboring comparable rent rolls, weighting the projected rent roll with new building against older, etc.
Then, of course, you have the rent up / occupancy lag time which needs to be figured in.

Doing the projections on PGI, VCL, Expenses and projecting NOI is the easy part.

As for completing the project is another story all together.

It depends on how long the property has been a shell, have the building codes changed? Were all the previous inspections in order and approved, etc.

In our case, building codes changed for the office building and it would be cheaper tearing the building down and starting from scratch than it would be to modify it to meet code. We walked from the deal -

As for the condo project, we are in negotiations with a builder who is willing to work at 10% over cost (with an open book policy) and participate in partial ownership of the project when completed.

As a FYI, my group controls over 2million sf of commercial space, so we have a little experience and can weather delays and reasonable cost over-rides.

Like the other reply said … call a few contractors. Get a few “ball-park” numbers and then add 30%. Use it in your calculation, and double the time you think it will take to get the building up and running.

Thank you both for your reply. Great content.

As a retired commercial appraiser, valuing shell buildings are very difficult. Getting a conventional loan is almost impossible.

The most accurate valuation method is what is called the cost approach. You are looking at the value of the land and site improvements plus the depreciated value of the shell. This is what you are actually buying. Yes there is the potential for a future income stream but that is in the future, you are buying the present.

As to the future income, yes you can value a property based on that but it is not as simple as capitalizing value and subtracting construction costs. The construction costs are a present expense, the income is a future gain. The potential for future income is not worth the same as money in your pocket right now. An appraiser would need to apply a discounted income valuation.

It works like this. Assuming a holding period of 5 to 7 years, the appraiser will determine (based on contractor estimates) how long it will take to finish the units and how many years it will take to gain full occupancy. He or she will also include the upfront costs of construction and the future operating expenses. All this will be in a spreadsheet. Then the appraiser will discount each future year’s net profit and loss to present value. Then that number is converted to value.

If you really want to take on this project, I highly recommend you make your offer subject to a commercial appraisal in order to value the property properly.


 actually it can be even simpler than that.

First there are two types of shell which are conforming use (Normally follows original plans) and non conforming use (A change of use, interior design, etc.). Obviously even zoning, the PUD and subdivision regulations could be involved.

Imagine an unfinished shell like a ground up construction project if your planning to complete it according to original design, original use and original intent as approved the shell is xx percent of your completed construction budget.

You don’t have to discount the shell as finished original use is your goal and intent, a good construction estimator can use a cost estimating data platform like RS Means and calculate down to almost the penny what the value (Cost) of the shell is in relation to the finished product.

Now remember when buying a shell that the subdivided value of the lot, the site utilities, and pre-paids like water and sewer taps, special assessment fee’s or permit fees have value.

Now provided your going to build the site out as was originally permitted a lot of things can be grandfathered to that original plan. New Fire / Life / Safety regulations will need to be followed specifically along with new earthquake, radon or flood plain regulations.

Most completed trades signed off during original construction will be honored, if say sheetrock nailing patterns have changed since original construction the building department will work with owners to find solutions without coming to “Tear it all Down”.

On the other side of the equation we know exactly what it will cost to complete construction including on and off sites and hard and soft cost’s because we can estimate cost’s almost to the dollar using construction cost data.

A conventional loan is not impossible with an experienced construction team but private equity construction financing is much easier, rates, terms and points are certainly more expensive than conventional financing but much easier to qualify for (Experienced Construction Team) and normally non recourse.

Now in the case of an existing shell say built originally for commercial but wanting to change zoning to residential, but let’s say original use was offices but you now want to change to Condo’s or Townhouses, and you now have site utilities problems with undersized utility runs then you have real issues to work through.

I will come back and address this in another posting!


When I mentioned conventional financing perhaps I needed to be a little more specific. I was referring to the difficulty in getting a non-construction loan. Non-construction loans (i.e. usable real estate) require the properties to be functioning very close to their highest and best use. If the property is an apartment building, for example, a conventional loan would require that the property could be used as such the day after closing.

A shell building, on the other hand, is lacking its highest and best utility because it is in an unfinished state. As an income property, it is unable to generate income. As a home, it is unable to be lived in. Thus the reason lenders gasp.

If the buyer, however, intends to get a construction loan, this scenario changes considerably. The value is then based on the percentage of completion in comparison with the value when completed.

Fix and Flip may be a feasable option if you can get the property for the right price and be sure to have solid numbers on rehabbing the property.