Income Capitalization for an ALF?

[The Warrior Monk]

I explain that in the subject's market this building is purchased by an owner/operator to run an ALF business and not for rental income and in addition there was no available rental information for this type of building.

I'm having trouble wrapping my head around this one. This thought process behind this statement could be applied to any owner-occupied commercial property. Are you stating that if the property is owner occupied, the income approach is not necessary in the valuation of the property?

Sometimes it pays to get back to basics. At the beginning of any assignment, I always ask myself "what is the primary motivating factor for purchasing this property." While I have no experience appraising this property type (apartment complexes are as far as I've gone in that direction), it would seem to me that the income stream is the primary motivating factor. The income approach would thus be a necessary (and likely only) approach.

I have received copies of previously completed reports on commercial properties that I have appraised, and the income approach is often tossed aside simply because it is difficult in general to obtain the necessary data, and in particular to develop cap rates. The cost approach seems to be the favorite alternative (which drives me nuts!m2.

When you have a unanimous opinion on this forum from a wide variety of appraisers, further confirmed by your client, and also apparently lacking any printed articles to support your thesis, it might be time to step back and reconsider.

 

[Kali the Boston Terrier]

masmia I assume you are rather new to our forum here, I just want to point out that some of the most talented commercial appraisers in the country I've had the pleasure to know have posted on your thread here. Some of these people are likely going to be the end user of your report. You may want to listen more and stop being defensive...this is free advice from very, very talented people.

 

[PropertyEconomics]

I appreciate all the informative answers to my OP. As of yet I have left out a detail to the subject property that may or may not change the situation. The subject building is small (3,200 SF) and originally set up as an 8 unit apartment building that was modified for ALF use. In addition, the subject's market area has many such buildings and even smaller ones that are single family homes converted for ALF use. Does the subject's building design change the applicability of considering the income generated by the business? What if it were a single family home converted for ALF use?

Lastly, consider the case of a Jewlery Exchange located in a retail location. Typically Jewlery Exchanges charge much higher rents than typical retail rents because the renter is getting more than just space. I was taught that the JE rent income above the current retail market rent was attributed to the business and not to the real estate and therefore not considered in the Income Cap. Is this not the same as the ALF?

If the rent of a JE is being paid to a landlord it is in fact income to the property and not to the business. IF the contract rent is well above market rent, then the market rent is capitalized and the excess rent (that above market) is discounted over the life of the lease and added to the capitalized value indication. Income has value and should be included. Excess rent is still rent, but has a higher risk associated with it thus the need for discounting the excess over the life of the tenancy.

I dont know who taught you to ignore the excess rent (as described above), but with all sincerity, they need some education.

 

[masmia]

PL,
You may be right.

Dave,
The whole reason for my continued posting of questions on this issue is because I am taking a step back and thinking this through. One of the things I enjoy about this type of problem is discussing it with others, sleeping on it, and coming up with a new perspective in the morning.

Brian,
Sorry if I've seemed defensive at times it's just annoying as hell when people on public forums stray from helping to attacking just cause somebody is asking more questions.

So, does the fact that it's a small apartment building converted for ALF use change the fact that you do not separate business income from the real estate? Would this be the same for the single family converted to ALF?

 

[PropertyEconomics]

PL,
You may be right.

Dave,
The whole reason for my continued posting of questions on this issue is because I am taking a step back and thinking this through. One of the things I enjoy about this type of problem is discussing it with others, sleeping on it, and coming up with a new perspective in the morning.

Brian,
Sorry if I've seemed defensive at times it's just annoying as hell when people on public forums stray from helping to attacking just cause somebody is asking more questions.

So, does the fact that it's a small apartment building converted for ALF use change the fact that you do not separate business income from the real estate? Would this be the same for the single family converted to ALF?

Do you have a good handle on the expenses associated with this property?

 

[Michigan CG]

PL,
You may be right.


So, does the fact that it's a small apartment building converted for ALF use change the fact that you do not separate business income from the real estate? Would this be the same for the single family converted to ALF?

A small apartment building "converted" to ALF is simply an apartment building with more "amenities". The income is the income.

 

[masmia]

PE,
Yes I do.

 

[PropertyEconomics]

PE,
Yes I do.

And how do your expenses compare with typical "apartment" type improvements??

 

[Mountain Man]

LOL when you said income cap for ALF... I was thinking ALF.

Was expecting some funny/weird description.

 

[masmia]

PE,
The expenses are greater than typical apartment type improvements.