Appraising Properties Having Multiple Components- Discount?

[mb1243]

In my market I have often been assigned appraisal on commercial properties which contain multiple building components. Say for example, you have a 10 acre commercial property which includes an office/warehouse building, two detached mini-storage buildings, three detached and freestanding office buildings and 4+/- acres of surplus land. In such situations I have developed the sales comparison approach in three parts with comparables and valuation for each property subtype. Then in reconciling to a final sales comparison value there comes the question as to applying a discount to the sum total value for multiple subtypes. My appraisal experience and education suggest that the value of the sum of the parts often does not reflect the value of the whole. There are no comparable properties to do a case study to extract a discount. Has anyone have run into this?

 

[Meandering]

In my market I have often been assigned appraisal on commercial properties which contain multiple building components. Say for example, you have

a 10 acre commercial property which includes an office/warehouse building,
two detached mini-storage buildings,
three detached and freestanding office buildings and
4+/- acres of surplus land.
In such situations I have developed the sales comparison approach in three parts with comparables and valuation for each property subtype.
Then in reconciling to a final sales comparison value there comes the question as to applying a discount to the sum total value for multiple subtypes.

Do each of these property "subtypes" have separate deed/title to the land you are including with the buildings, or is this one tract of land with multiple buildings on it that you are pretending are subdivided parcels? It's hard to tell from the way you wrote your question.

My appraisal experience and education suggest that the value of the sum of the parts often does not reflect the value of the whole. There are no comparable properties to do a case study to extract a discount. Has anyone have run into this?

Economy of scale

.

 

[Michael S]

Most people aren't in the market to buy a hodge podge of a property. I've seen a combination car wash, self storage, c-store listed for sale and it lingered on the market a long time. While each individual component might be easily marketable on it its own. Combine them and you have a big mess that will probably require a discount for somebody to buy. I think your methodology sounds fine and I can't really see another way to look at it when you have such diverse uses.

The income approach might be more applicable in these cases as an investor might not care as much whether the rent is coming from an office/warehouse, an office, a retail store, or a self-storage building. Your cap rate will probably be at the upper end as once again a prospective buyer might demand a higher return to take on such an unusual property.

 

[mb1243]

Do each of these property "subtypes" have separate deed/title to the land you are including with the buildings, or is this one tract of land with multiple buildings on it that you are pretending are subdivided parcels? It's hard to tell from the way you wrote your question.



Economy of scale

.

This property is one single tract of land, and given the frontage and configuration of the site and buildings, it cannot be subdivided. I guess a simpler example would involve say a commercial property that includes an adjoining tract of excess land and the assignment calls for one value. Do you just take the value of the improved property component and add the value of the excess land tract to get the total property value, or apply a discount? If a discount is applied, how is it determined if there are no comparables to extract such a discount from?

 

[mb1243]

Most people aren't in the market to buy a hodge podge of a property. I've seen a combination car wash, self storage, c-store listed for sale and it lingered on the market a long time. While each individual component might be easily marketable on it its own. Combine them and you have a big mess that will probably require a discount for somebody to buy. I think your methodology sounds fine and I can't really see another way to look at it when you have such diverse uses.

The income approach might be more applicable in these cases as an investor might not care as much whether the rent is coming from an office/warehouse, an office, a retail store, or a self-storage building. Your cap rate will probably be at the upper end as once again a prospective buyer might demand a higher return to take on such an unusual property.

I agree that the income approach is the most reliable indicator. But say if the second property type is a single family residence attached to a commercial property, or a tract of excess land, and the assignment conditions call for one single property value, is it normal and proper appraisal practice to simply add the sum of the values of the distinguishable components, or apply a discount to the sum total?

 

[hastalavista]

I agree that the income approach is the most reliable indicator. But say if the second property type is a single family residence attached to a commercial property, or a tract of excess land, and the assignment conditions call for one single property value, is it normal and proper appraisal practice to simply add the sum of the values of the distinguishable components, or apply a discount to the sum total?

Excess land is always valued separately and then added to the total; however, excess land reflects the as-is value of that area and may require a discount (EI + costs to make it a separate site ready for development) if the comparables used are already separate sites, ready for development.

Some property types are valued as a sum-of-the-whole. Vineyard/wineries, for example, may have (a) vineyards (planted and ready-to-plant land), (b) a winery building, and (c) a residence. Buyers in for that property type many times will value the individual components and sum them; sometimes at no discount.
However, for other hodgepodge properties, breaking out the components individually is probably not the way the market participants value them. Or, if they do, they would likely not apply a uniform discount. A buyer may be more interested in the warehouse space then the small house on the same site.

Every situation is unique, but in general, I'd be inclined to go with the income approach as that data (rents and expenses, and cap rates.. which might be a blend of the various uses) are probably higher quality than what you'll find in the sales comparison approach. In such a case, I might consider the sales comparison approach as a test of reasonableness only. And, I'd have to think about where to apply the adjustment in the grid for the difference in ownership: My stand-alone warehouse property likely has a higher value than my warehouse component (all other things being the same) in my hodgepodge subject if for no other reason than the comparable can be traded on a stand-alone basis; that sounds like a property rights adjustment to me.

 

[Michael S]

I just remembered a somewhat similar property I worked on as a trainee about five years ago. About a 10,000 square foot 4-tenant retail strip center with a 2,000 square foot shop behind it and a small 2BR/1BA SFR behind that. Looking back through the report it looks like we determined a value (by SCA) for the commercial portion using mostly sales of other small local retail strip centers and then a separate value for the SFR using some nearby sales and summed the two together with no discount. The commercial portion (retail and shop building) were about 90% of the value and the house was relatively minimal. The income approach was a little more straightforward and used cap rates from a variety of retail strip centers and other commercial properties. In the end it looks like both approaches were given equal weight.

 

[mb1243]

Excess land is always valued separately and then added to the total; however, excess land reflects the as-is value of that area and may require a discount (EI + costs to make it a separate site ready for development) if the comparables used are already separate sites, ready for development.

On page 13, second paragraph of the Appraisal Institute's Common Errors and Issues it states "Be careful about adding the value of the excess land to the value of the rest of the property, as the sum of the parts may or may not equal the whole".

 

[hastalavista]

On page 13, second paragraph of the Appraisal Institute's Common Errors and Issues it states "Be careful about adding the value of the excess land to the value of the rest of the property, as the sum of the parts may or may not equal the whole".

The warning is in regards to not considering the market discount (EI + costs) involved in converting the excess land into its own stand-alone, ready-for-development site.

 

[Red Flint]

I would look at the savings in maintenance, landscaping etc, say 1%, by having a combined portfolio of properties, then evaluate a lower risk due to a multi-pronged income flow, say 1/4% in a direct capitalization rate. Compare the income approach individually versus combined properties with those numerical changes, then deduce a percentage to apply in the sales comparison approach.



It is important to evaluate the possibility of property splits based on road frontage. It is much more credible to apply a multiple sales comparison method if your common property types could be conceivably split (have enough road frontage for three or more possible splits).



May be worthwhile to look harder for data in other markets with combined commercial property sales versus stand-alones for a ratio to apply to your particular market.