Lease Up Cost on Owner Occupied Prop

[Rlong]

Looking at a another appraisers report. A 2,000sf retail "condo" in small strip center (5-10 yrs old). In the Income approach lease up cost are deducted (rent loss, moderate T.I., and leasing commission) from income approach value conclusion "because it is owner occupied".

I would deem this a "typically owner occupied" property.

I do not tend to do this myself; but was curious if others have done this on owner occupied commercial properties?

Thanks
Bob

 

[KHS445]

Bob,

What is the typical for the subject's market? If the typical unit is owner occupied than I would not deduct those items. On the other hand if the majority of the other units in the complex/market are leased in arms-length transactions then I would include those expenses, with the amount of the adjustment based on the market.

Did the other appraiser take those expenses in exchange for using a less than market capitalization rate. By spreading the expenses between several different categories it may have been his/her way of bringing down the estimated value.

 

[hastalavista]

I would deem this a "typically owner occupied" property.

Out of curiosity, did the original report identify the most likely buyer as an owner-user, or did it identify both owner-user and investor as competing buyers (or, did it not identify a likely buyer at all)?

 

[cejack]

I do not see this done for owner-occupant or small properties in Las Vegas.

I find it kind of strange. Perhaps the appraiser has employed this likely valid tactic for a lot of multi-tenant rental investment properties and just doesn't realize the difference for a small owner-occupant property.

If it is most likely to rent, then I could see perhaps a commission and possibly TI deduction if necessary and supported by other market examples. However, a lease-up discount would be counter to my experience. The property is a "binary" occupancy property. It is either occupied or it is not - 0% or 100% by an owner-occupant in many instances.

Once purchased, if owner-occupant, it will be 100% occupied. So will the comps.

The lease-up question, if even applicable, is less-complicated and is answered by figuring out how quickly you can get a tenant in there at market rent.

Probably an understatement of value here is most likely. Reduced market for these properties, if applicable in your market, should already be reflected in the comps and/or the few competitive rental comps that you use for comparison to this property.

 

[Ken B]

I think the real question regards which approach was given most or all weight in the reconciliation section. Assuming there was an SCA approach, were the comps owner-user properties? If the interest appraised was the fee simple estate and the SCA used primarily owner-user sales, then no weight should be given the ICA in the Reconciliation section, even if the ICA approach was developed.

Some might argue that use of market rents in the ICA should result in a value indication that would be indicative of the interest in fee simple estate. But I think it is a weak argument in a property which the HABU is as an owner-user property. Perhaps the approach was developed to demonstrate that HABU is as an owner-user property? Any discussion in that regard?

 

[Rlong]

grammer

Thanks for everyone’s input; I will try to address comments questions. This has helped.

Although the center is primarily leased, there are a number of owner occupied units. An “at market” overall cap rate was used and indicates an income approach value indication that is 60% of the sales comparison approach (including lease up expenses). Even prior to the lease up costs deduction the Income Approach indication was significantly below the sales comparison approach.

The report does not indicate a likely/typical buyer; in general discussion and explanation is lacking.
I agree with Cejack “Perhaps the appraiser has employed this likely valid tactic for a lot of multi-tenant rental investment properties and just doesn't realize the difference for a small owner-occupant property.”

In the end 100% of weight was given to SCA, as might be expected for a currently owner occupied property. The sales comps are limited and disparate (huge range $/sf) with one “good” comparable, and 4 less comparable comparables; as such it would be nice if the income approach was somehow more instructive.

Overall, adequate discussion and explanation is lacking; and it is difficult to follow the appraiser analysis. I was glad to hear others input that supported my some of my thoughts.
Thanks

 

[Highlight17]

Lease Up Cost on Owner Occupied Property

Thanks for everyone’s input; I will try to address comments questions. This has helped.

Although the center is primarily leased, there are a number of owner occupied units. An “at market” overall cap rate was used and indicates an income approach value indication that is 60% of the sales comparison approach (including lease up expenses). Even prior to the lease up costs deduction the Income Approach indication was significantly below the sales comparison approach.

The report does not indicate a likely/typical buyer; in general discussion and explanation is lacking.
I agree with Cejack “Perhaps the appraiser has employed this likely valid tactic for a lot of multi-tenant rental investment properties and just doesn't realize the difference for a small owner-occupant property.”

In the end 100% of weight was given to SCA, as might be expected for a currently owner occupied property. The sales comps are limited and disparate (huge range $/sf) with one “good” comparable, and 4 less comparable comparables; as such it would be nice if the income approach was somehow more instructive.

Overall, adequate discussion and explanation is lacking; and it is difficult to follow the appraiser analysis. I was glad to hear others input that supported my some of my thoughts.
Thanks

There are certainly differences as to how appraisers handle this. Although I have no strong feelings either way, I am of the opinion that a lease up deduction is appropriate. Since the income approach is predicated on a tenant occupancy, then inclusion of such lease up costs is consistent with the basis of the approach and is necessary to accurately assess the property's HBU.

 

[Terrel L. Shields]

Many of the small commercial properties in the small towns I work have never been leased out. Most have NEVER been leased in their lifetime. Thus, I find the income approach in such cases to be worthless...otherwise, you are appraising the business Enterprise Value of the property.

But a strip mall with leased units...I would do that like the manager's apartment in an apartment complex. I would estimate the mgr. apt. rents, add to the income, and use direct cap rates or GIMs. I see no reason to apply a discount personally...unless you are using the owners own stated rents..which typically would be high so as to deduct that as an expense on the P & L for tax purposes.