build-out cost

Discussion in 'Commercial/Industrial Appraisals' started by justinschroeder, Dec 20, 2011.

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  1. justinschroeder

    justinschroeder New Member

    0
    Sep 13, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    How do you handle build-out cost in the income approach. I have seen different ways. One way was to, value as the build-out was complete and then deduct the build-out cost and maybe incentive (depending) from the final value, which seems simple and I like simple. The other was to amoritize the cost of the build-out as an expense, which seems like it would have a-lot of guessing involved. (term, rate, money down)
     
  2. Mountain Man

    Mountain Man Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Georgia
    Deduct the build-out cost and incentive from the indicated value is more reasonable.
     
  3. Howard Klahr

    Howard Klahr Senior Member

    12
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    TI in the income approach does not necessarily represent the actual cost to perform the build out, It is an allocation of the cost between the landlord and the tenant. In performing the DCF you need to account for the amount expended by the Landlord in the period in which the expenditure occurs.

    Amortization of the TI allowance is a reimbursement mechanism whereby the Landlord receives payment from the Tenant over time of the amount spent by the landlord on the Tenants behalf.

    These are opposite ends of the cashflow spectrum - one is an expense the other is a revenue. You may even have both within the same analysis. Hope this helps
     
  4. justinschroeder

    justinschroeder New Member

    0
    Sep 13, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    The way it was presented in the report was:

    $25 TI for 2,320 square feet = $58,000

    $58,000 was then amortized through a bank loan at 5% for 8 years leaving a payment of $9,340 per year. This was then deducted from the income as an expense.

    It seems different and very speculative.
     
  5. stedios

    stedios New Member

    0
    Sep 29, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    If you capitalize the noi with the $9k as an expense you're basically saying that the expense will exist "forever". Get your value and deduct $58k, plus (minus...) some incentive.

    If you are doing a dcf deduct in year expense is expected.

    (sent from iPad; excuse typos)
     
  6. Howard Klahr

    Howard Klahr Senior Member

    12
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Justin,

    Based on what you described that is not an appraisal but rather an investment analysis. It would be like trying to value the property based on the after tax cash flow. You should just deduct the $25 per sq ft in the period that the lease occurs.

    Just for grins however, I assume that this is for a new lease. How long is the term of the lease?
     
  7. justinschroeder

    justinschroeder New Member

    0
    Sep 13, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    Its an active listing and they are trying to get at least a five year lease. There are three units in the building, two of which are built-out and leased. The third is stripped down and needs finished before it can be leased. They want the value of the whole building.
     
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