Appraisers' Free Forum

I've got a nasty commercial problem:
Facts:======
17,500 sf one-story office building, one end (about 1/4 of the building) has a brick façade, the rest is metal. Whole structure is clear-span pre-engineered metal w/insulation, slab above grade. Commercial carpeting, extensive partitioning, good fluorescent lighting, two rest rooms w/ 7 fixtures each, suspended ceiling at around 9', and estimated 16' height at roof peak.

Second bldg is a 4,000 sf structure, clear-span pre-engineered, insulated, slab above grade, one loading dock, two radiant gas heaters, no a/c, fluorescent lights, 20' roof peak, no ceiling.

These are on a tract of land, estimated 11 acres of a 171 acre tract. Client wants to buy the 11± tract from the owner (a municipality).

Naturally, there are no similar one-lot, two-dadburn different-building sales in the last ten years. Can't even find a similar one that was built.

Question(s):=====
Without similar comps, I'll have to do land-and-contributory value for the SCA. For the income approach, no comps means no reliable OAR. I'm thinking of using split-cap methodology and deriving a separate rate for the land, for the office bldg, and for the small warehouse. Would any of you do this differently?

Land (site value) is complicated by the fact that the whole shebang sits in an industrial park that will give away the land if you'll locate and operate a business on it that will employ some of the nearly 10.5% unemployed in the area. (This amounts to 1-2 acre sites. There haven't been any encompassing 11 acres, but half of the subject's site is excess anyway.) The few actual sales of sites have been at about 20-25K/acre for 1-4 acre tracts.

Your thoughts and feedback would be appreciated.

Similar is not always similar. I'd be looking for a large office building with an attached warehouse. The fact that yours is separated into two buildings may be an advantage to some operations and a disadvantage to others. I've seen quite a few constructions similar to what you are describing over the years, but I'm not sure I've ever seen one in an industrial park. Without knowing more about your area, it's hard to give more specific advice. However, my general advice is that you use the best comps you have (don't be afraid to go back a few years, or out to other similar market areas). This isn't residential, so they don't have to be model matches. One other thought... you could consider valuing the buildings from sales of separate buildings that are similar to each of them. Note that you cannot come to your opinion of value solely by adding these together.

You might be on the right track for the income approach. Again, without knowing your area better, it's hard to tell.

Steve Owen wrote:Similar is not always similar. I'd be looking for a large office building with an attached warehouse. The fact that yours is separated into two buildings may be an advantage to some operations and a disadvantage to others. I've seen quite a few constructions similar to what you are describing over the years, but I'm not sure I've ever seen one in an industrial park. Without knowing more about your area, it's hard to give more specific advice. However, my general advice is that you use the best comps you have (don't be afraid to go back a few years, or out to other similar market areas). This isn't residential, so they don't have to be model matches.

I'm with you on that thought. Just did a 121-mile comp run Sunday afternoon. It's a damn good thing they don't have to be too similar.

One other thought... you could consider valuing the buildings from sales of separate buildings that are similar to each of them. Note that you cannot come to your opinion of value solely by adding these together.

Actually, you can if you're doing land + contributory value. Take your sale price, and subtract the comp's--not the subject's--site value from it (support that value, of course).Subtract estimated contribution of site improvements. From the resulting adjusted selling price, adjust for differences. But note that no location adjustment is warranted because location is addressed by the site value. A percentage time adjustment may be warranted. All the other adjustments are done the traditional way. When you finish, if you got it right, you should have an indication of just the contributory value of the building. Add that to the subject's supported site value and estimated value of site improvements, and it should represent true MV. It's kind of a three-rail bank shot into MV, but right now it's all I've got. And certainly the issue of assemblage needs to be addressed in the report.

You might be on the right track for the income approach. Again, without knowing your area better, it's hard to tell.

Maybe. But how in hell am I going to come up with a land cap rate where almost none of the durn stuff is leased, and much of it is given away? Guess I'll go to more urban areas and adjust for location.

Jim Plante wrote:

Steve Owen wrote:Note that you cannot come to your opinion of value solely by adding these together.

Actually, you can if you're doing land + contributory value.

Actually, you cannot. I think that what you are describing is more than coming to an opinion of value "solely" by adding the value of two separate properties together. The prohibition is against valuing property A and valuing property B and coming to an opinion for the whole by adding the two together without doing anything else. It refers to the bottom line opinion, not the development of intermediate steps, IMHO.

The main point I wanted to make was to not get too hung up on the fact that you have two separate buildings. Consider it from the buyer's point of view. Suppose you have a cable company, electric utility, radio station, insurance adjuster, or any other use that requires a large amount of office space and a small amount of warehouse. Do they care if the buildings are separate? Some might... for others, it might be an advantage to have them separate. For most, however, I doubt if it would make much difference.

Income: consider this possibility. Instead of doing it by IRV, develop market rates of rent of each kind of space you have. Multipy the market rate times the volume of space, subtract vacancy and collection, subtract reasonable expenses (as seen from a lessor's point of view) and capitalize the result. If you are only valuing fee simple real estate (and not business or goodwill), this should actually give you a more reliable result... and, the problem of cheap industrial park land basically just goes away. Developing vacancy and collection can be a problem in some areas. However, the toughest part of this is capitalization rate. If you cannot pull it directly from the market, it can be sticky. Still, I think most of this data would be easier to develop than what you are talking about trying to do.

Steve Owen wrote:Still, I think most of this data would be easier to develop than what you are talking about trying to do.

Actually, I think you're right. And as to the first paragraph, I think we're pulling on the same rope.

Jim Plante wrote:

Steve Owen wrote:Still, I think most of this data would be easier to develop than what you are talking about trying to do.

Actually, I think you're right. And as to the first paragraph, I think we're pulling on the same rope.

I figured we would be.

Concerning the IA method I mentioned. It is really much easier to do if the property owner will give you some actual expenses; you almost always have to figure reserves and misc as well as landlord property management for yourself... taxes are a given. Property insurance (building fire and extended coverage) is usually one of the hardest to come up with because most owners don't break it out. Also, if you can pull cap rates from the market that simplifies things a lot... again, don't get too hung up on similar properties having to look similar. I'd consider any office sale where NOI is known or can be reasonably figured a comp for cap rates, then weight them based on which are most similar and most recent. If you cannot get sales with NOI, consider doing the IA from a GIM perspective... of course, that's a new can of worms.