Posted by ray@lcorn on January 28, 2010 at 11:34:15:
In Reply to: Ray, how does lease-up period affect value? posted by Jusk on January 27, 2010 at 10:09:48:
Jusk,
Unless the deal comes with the tenant deal in hand the income approach is not valid for a vacant property. Appraisers yes, because they can adjust for all conditions, but we're not appraisers. Why would I pay a seller for non-existent income?
My valuation would be done from the basis of replacement cost, less depreciated value and deferred maintenance. Here's a generic example:
Say it's 10,000 sq.ft. (which is small, but makes the math easy. Add zeros as needed.), ten years old with useful life of 39 years (per IRC depreciation schedule), costs about $50 psf to build, needs $25T in deferred maintenance and the land is worth $100,000. As-is building value is $50 x 10000 = $500000 less accumulated depreciation of $128200 ($500000/39 years= 12,820 x 10 years = $128200) = $371,800 plus $100000 land value = $471,800 - $25000 deferred maintenance = $446,800, base value.
Please note this is an example, and NOT an exact science. Consideration has to be given to functional obsolescence, especially in warehouses. Location, ceiling hgt., loading docks, floor load capacity, power service, transportation access... all these things and more can drastically impact the base value in this property type.
From the base value you then have to calculate what you think you'll have to spend to attract a tenant, including the carrying costs for the time to lease it and commissions and decide if it is worth your time.
I treat the carrying cost of a vacant building as part of the equity investment. My desired return on the total investment drives the lease rate.
For example: Say the building is $1mm purchase price, 75% LTV (good luck finding that unless seller financed, but this is an example), interest-only at 5% for three years. So I've got $250T invested up front. Say I spend $50T in carrying costs over one year while vacant. Total investment now $300T. The required lease rate is based on servicing the investment (debt and equity) and whatever upfit costs are involved.
Where the projected valuation via income approach comes into play is in the exit from the investment to project overall returns. But that involves a lot of assumptions, as in all the above, and in my opinion is no more than a check against the cost valuation.
ray
- Re: Ray, how does lease-up period affect value? Just 13:43:01 01/28/10 (1)
- Re: Ray, how does lease-up period affect value? ray@lcorn 14:32:43 01/28/10 (0)