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Cap Rates / Multi Family Buildings

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jmst

Freshman Member
Joined
Mar 16, 2017
Professional Status
Certified Residential Appraiser
State
Missouri
i am appraising a group of multi family buildings subject to plans/specs. They are situated in an urban area of 80-125 year old buildings with a wide range of condition and value. The buildings were shells at the time of inspection with the builder taking advantage of tax credits to historically preserve buildings in the previous form. The plans call for a high level of finish with projected rent schedules at the top of the market range. Due to the lack of new buildings in the market - i have utilized renovated buildings with comparable rent schedules as the subject in the comparable mix. The immediate market area represents the high end of the value range for multi buildings in the city so it is not possible to expand search criteria. My value range for the buildings is 300k to 350k with the highest sale in the area 356k.
The seller is arguing that his buildings will be in far better condition than the comparables utilized and wants to know why i didnt utilize the cap rate for income properties (for all types of commercial properties) in the area of 7.5% to arrive at a value double of what was supported by the sales approach and income approach utilizing the gross rent multiplier. He provided three apartment building sales for support for his cap rate.
I tried explaining that apartment building sales were considered and would have completely different appeal to the market than mulit family activity. Developer has been successful in selling new construction single family homes in the 400k to 500k range in the area dominated by value range in the 100k to 150k range and is expecting values for the multi family builidngs in the 500k range eventhough the highest sale activity is in the 350k range. Despite being effectively newer/upgraded units, the projected rent schedule falls in line with the renovated buildings. Why would a prospective buyer pay twice as much for the same income.
Can anybody assist in helping me to support/explain the dynamics/variance in appeal for the multi family market and the impact of overimprovement.
Thanks
 

A K

Elite Member
Joined
Jul 31, 2013
Professional Status
Certified Residential Appraiser
State
Maryland
What is the basis for your conclusion that the projected rent is in line with the renovated buildings?
 

PL1957

Senior Member
Joined
Jul 19, 2004
Professional Status
Certified General Appraiser
State
Illinois
I guess I'm confused by the difference between "multi-family" buildings and "apartments". Can you clarify? How many total units? Will they be operated as a single economic entity? How are you reflecting the value of the tax credits?
 

A K

Elite Member
Joined
Jul 31, 2013
Professional Status
Certified Residential Appraiser
State
Maryland
I would try to find the same kind of new building elsewhere in the city and see how much more they trade for compared to renovated old buildings in it's area.
 

jmst

Freshman Member
Joined
Mar 16, 2017
Professional Status
Certified Residential Appraiser
State
Missouri
I guess I'm confused by the difference between "multi-family" buildings and "apartments". Can you clarify? How many total units? Will they be operated as a single economic entity? How are you reflecting the value of the tax credits?
the apartment building comparables provided by the builder are 40+ unit buildings. My subjects are two and four family buildings and are single economic entities. I did not attach any added value for the tax credits.
 

jmst

Freshman Member
Joined
Mar 16, 2017
Professional Status
Certified Residential Appraiser
State
Missouri
I would try to find the same kind of new building elsewhere in the city and see how much more they trade for compared to renovated old buildings in it's area.
i have spoken to appraisers for the assessors office, investors in the area of similar type buildings. There are no available sales of newer 2-4 family buildings in market area or surrounding market areas. Typically, these buildings would be converted into single family homes or townhomes/row houses. It is rare they would be reconstructed as 2-4 family.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
How do the tax credits work? Are they captured 100% by the developer (your builder), were sold off already, or do they flow to the property?

Are you familiar enough with income analysis such that you can, based on your concluded value, do a pro forma on your subject properties and see what the implied cap rate would be?
 

jmst

Freshman Member
Joined
Mar 16, 2017
Professional Status
Certified Residential Appraiser
State
Missouri
i have spoken to appraisers for the assessors office, investors in the area of similar type buildings. There are no available sales of newer 2-4 family buildings in market area or surrounding market areas. Typically, these buildings would be converted into single family homes or townhomes/row houses. It is rare they would be reconstructed as 2-4 family.
my contention is that utilizing cap rates derived from large apartment building sales is not relevant for the 2-4 family buildings. Utilizing the cap rate that the builder desires would result in a grossly inflated valuation not supported by 2-4 family activity. Am i off base
 

jmst

Freshman Member
Joined
Mar 16, 2017
Professional Status
Certified Residential Appraiser
State
Missouri
What is the basis for your conclusion that the projected rent is in line with the renovated buildings?
the renovated sales i utilized have rent schedules in line with anticipated/projected rent schedules provided by the developer.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
my contention is that utilizing cap rates derived from large apartment building sales is not relevant for the 2-4 family buildings. Utilizing the cap rate that the builder desires would result in a grossly inflated valuation not supported by 2-4 family activity. Am i off base
(my bold)

No, you are not necessarily off-base.
But before you go too deep, are you familiar enough with direct-capitalization income valuation methodology to evaluate how a direct cap analysis might apply to your subject-type properties.

(Likely, if one is going to do a direct cap analysis, the best properties to derrive those rates from are similar property types with similar buyer types and similar risk characteristics).
 
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