I'm a beginner in the commercial real estate arena and still learning how the appraisal process works for strip malls.
When a strip mall is 60% occupied, the value is calculated from the NOI of the 60% occupied space divided by the CAP rate. Do you also factor in the value of the 40% unoccupied space? If so, how do you come up with those values.
Thanks in advance.
I am a former appraiser. From an income approach: Value property at a stabilized occupancy then deduct the cost to get it there - time value of money discount and cost of commissions and physical tenanting costs.
I'm looking at a strip mall that is currently 40% occupied. The owner's asking price is based on the actual NOI of the occupied space plus the going rate per square footage for the vacant units in that area.
Now is his asking price legitimate or is he asking too much since he's factoring in the vacant units?
It depends on the property rights being appraised. The value of the fee simple position would establish market rent then deduct for vacancy and collection loss (say 10%) and other appropriate operating expenses. This would give you a MARKET value based on MARKET factors. The owners position (leased fee) would be lower than market because an appraiser would only consider the value of his current leases. I doubt MARKET vacancy is actually at 40% where you are. Appraisers are typically asked to appraise the fee simple interest at market value. You need to understand there are different property rights and different types of value. If leased fee = fee simple, then leased fee = market value. If leased fee < fee simple, then leased fee is < market value. You are probably more interested in investment or intrinsic value.
For your purposes, I would value the property based on the 40% vacancy. If he wants to the sell the property as if it were stabilized, then he needs to stabilize it then sell it. I would never reward a seller for something I have to do.
Read all leases word for word. Run the numbers yourself with a 40% vacancy (I'd be curious to know why it's 40% vacant). The leases will determine the operating expenses you need to include. You need to know an appropriate cap rate to apply to the current NOI. Check sales of other retail properties in your area and compare them on a per/S.F. basis. The cost approach probably won't help much here. You also need to know what the property will be worth if you get it to a stabilized level.
[ Edited by dburch on Date 01/29/2008 ]
I'm coming up to speed and very new in commercial real estate, also. Hey haxton1, what is stabilized occupancy? My guess is it's full occupancy less the market vacancy in the area, but was hoping you could explain-
TIA
ann
"Stabilized occupancy" is average square foot occupancy over a period - say, your holding period. In a good market with a good property this may be 90-95%. In a strong market 95% or better.
[ Edited by haxton1 on Date 02/05/2008 ]