Commercial, residential, or multi-family?

[Tater Salad]

I've been following the "commercial or residential?" thread and took all that in. Can I add another twist?

I have a SFR with a 3-family and a 2-unit commercial building all on 1 acre. I am definitely not qualified (yet) to do this. But I hope someone can help me with how to guide the lender in this sitch.

The zoning is multi-usage (SFR or multi) but not commercial. He has a conditional use for the commercial. The income is the same for the commercial bldg as for the multi. The land and add'l bldgs are worth more than the SFR, which is 60 yrs old & shows it. Residential use is believed to be interim as there is a strip mall adjacent to his lot, and a utility switch-house for the phone co. on the other lot. Residential across the street. Zoning is in a state of flux (newly incorporated city) and they are still working on the new zoning map :roll:

It would seem that HBU is multi and should be appraised that way as the commercial is a conditional use? And try to find sales of multi's w/small commercial? What are the parameters for "interim use" as eventually this will be commercial (the homeowner will tell you so!) but who knows when as this is a little burg w/land o'plenty available.

I'm looking for what to say to the lender other than,"I don't know my &*%@[email protected]* from a hole-in-the-ground", which is the truth for this property, but doesn't shine a favorable light on me. :lol:

Am I right with: Probably HBU multi, but interim use, value added for commercial limited and I need more $ for this because I need to get assistance?

 

[George Hatch]

It is what it is. If the commercial is allowed to be there, then it is a legal use. Probably non-conforming, in which case the ability to rebuild may be in question (best to ask the zoning authority about their policy for rebuilds). Unless the underlying site value exceeds the value of the existing uses, you appraise it as it sits. Classic mixed use appraisal scenario.

You will actually have two components; multi family and commercial. The SFR gets lumped in with the other residential units. To do it properly, you'll probably have to find comps for each component, and yes, the income approach will probably play a prominent role. It's usually impossible to find mixed use comps with the same mix of residential and commerical uses. It would be best to divide the potential income by percentages according to how much each component contributes to the net income, remembering that residential uses usually have higher expense loads than commercial uses. Blend the cap rates and GIM indicators by those percentages, and that should give you a pretty good indication of the value on the income approach side.

For the Sales Comparison, you'll be looking for multi-family uses and commercial uses of similar scope. What I mean by this is that if your total GBA is, say, 5,000 SqFt, the best commercial comps will be 5,000 SqFt and the best residential comps will also be 5,000 SqFt, even though the actual component sizes on your subject property are smaller. That way you'll be using comps with a similar economy of scale. Your most consistent unit of comparison for the apartments will be the price/room.

Mixed use properties are more work than single use properties because you essentially do two sets of analyses and blend the results. Twice as many comps, etc. Since the uses are neither homogenous nor complementary, they will probably have a mutually adverse effect on their component values as if standing alone; possibly enough to require some discounting. I recommend you charge a little extra, and of course, get some help.


George Hatch

 

[Farm Gal]

George:

That is the least verbose and most effective analysis of the described situation that I have ever seen. Beats the heck out of any textbook description of how to start solving the problem I've ever run across!

A sincere THANKS from the peanut gallery!

 

[Tater Salad]

Thank you--told the lender about the property and I think we sounded like we knew what we were talking about.

Unfortunately, they can't place a loan for a property like that so I won't be learning anything this time, and I don't have the time to do it on my own dime. Hope to get another chance at a later date.

Thank you again!

 

[Steve Owen]

As usual, when George gets there first, there isn't much left to say. lol.

Thanks, George, for giving me a brush-up on these things. You don't do them very often in my neck of the woods, so you kiind of have to re-learn with each one of them.

Two other things you might want to consider. One is that you always do the land as if vacant at highest and best use; for the improved property to be the same H&B, the improvements must add value. This of course becomes a lot more dicey with a mixed-use property, but step back and analyze what would be the highest and best if nothing was there now; that will tell you where to look for land comps.

The second thing, is that you should beware of simply appraising the sections each separately and then adding them together. The way George described it is correct, you have to blend the analysis. In other words, the value of each separate section, if sold separately, does not necessarily equal the value of the whole.