Not deducting for vacancy.

[aussie ken]

It is entirely UNREALISTIC to not provide some sort of allowance for vacancy and collection loss regardless of how strong the tenant or lease appears to be...........as my colleagues have stated the dynamics of business and governments see tenants come and go over the full life cycle of a property..........the only arguement is what the quantum amount of the allowance should be within your calculations...........I suggest at least the equivalent of 1 weeks rental income for a strong tenant and lease and grade this up to higher amounts as you see fit.

 

[PL1957]

It is entirely UNREALISTIC to not provide some sort of allowance for vacancy and collection loss regardless of how strong the tenant or lease appears to be...........as my colleagues have stated the dynamics of business and governments see tenants come and go over the full life cycle of a property..........the only arguement is what the quantum amount of the allowance should be within your calculations...........I suggest at least the equivalent of 1 weeks rental income for a strong tenant and lease and grade this up to higher amounts as you see fit.

Ken, I think your colleagues at Galileo, Westfield, Centro, etc. would disagree with you, especially in today's market. The credit of the tenant is key to current valuations for leased properties and making an arbitrary 1.9%+ vacancy and collection loss doesn't reflect the way the market is valuing these deals.

While accounting for eventual tenant vacancy or rollover is obviously technically correct from an appraisal standpoint, we need to recognize that most market participants don't really care to be technically correct in their analysis.

 

[Boonders]

The value is the same either way. The main thing i think the poster needs to take with him/her is to extract and apply cap rates the same way. The rest...definitely appears arguable.

 

[Kali the Boston Terrier]

For GSA leases I do not include any V/C allowance.

I was brokering a GSA lease that was supposed to be a 10 year lease, the Gov't exit provision was stated like this. "The Gov't reserves the right to cancel the agreement anytime after the initial 5 year mark with 120 days notice."

Guess what happened to my 10 year lease, yep it became a 5 year lease with an option to renew another 5 year lease. That one sentance cost me nearly $60,000 in comissions...you better account for the Gov't taking a not so graceful bow. Even without that sentance my Gov't clients like to joke that they do not even need to include that sentance in...they are the Gov't they can exit whenever they want...the sentance is just a courtesy, nice huh!

Another one of my brokering clients has several hundred retail developments, he told me that Starbucks just walked away from several signed leases, hundreds of LOIs, and many custom build to suits. One day they were on target for 1,300 stores in N. America, next day plan got revised to 700...

Moral of the story, there is no such thing as no risk. You have to account for risk in the income approach in either V/CL and/or build it in the cap rate/IRR. Anyone who fails this basic principle is missing the whole concept behind anticipation. Risk and return is what makes that theory work.

 

[Boonders]

The government can be sued. They walk from a lease they were bound to...they'll get sued.

Same with Starbucks. I'm guessing they worked out a deal, bought out the leases to make the property owner's whole. Unless its stated within their lease, they can't walk from a lease. Just because they close a location doesn't mean the property owner got the short end of the stick.

 

[Michigan CG]

I was brokering a GSA lease that was supposed to be a 10 year lease, the Gov't exit provision was stated like this. "The Gov't reserves the right to cancel the agreement anytime after the initial 5 year mark with 120 days notice."

I don't recall seeing that in any of the Social Security buildings I have done. Firm 10 year leases. I will have to read the next one I get closer to see if I find that. BTW, the ones I do are build-to-suit properties.

 

[PropertyEconomics]

Ken, I think your colleagues at Galileo, Westfield, Centro, etc. would disagree with you, especially in today's market. The credit of the tenant is key to current valuations for leased properties and making an arbitrary 1.9%+ vacancy and collection loss doesn't reflect the way the market is valuing these deals.

While accounting for eventual tenant vacancy or rollover is obviously technically correct from an appraisal standpoint, we need to recognize that most market participants don't really care to be technically correct in their analysis.

Its not their analysis ... its ours ... and we have to live by USPAP and one cannot produce a misleading report. Both investors and appraisers can do all of their calculations on a cocktail napkin, only ours must meet the requirements and regulations which govern us.
That having been said, as long as the comparable expenses are calculated in the same way the subject expenses are calculated (or vice versa) the overall rate will reflect either a vacancy rate or no vacancy rate and application to the NOI when calculated in the same manner will result in an accurate valuation all other things being correct.
In any event, addressing vacancy and collection loss must be within the report and its application consistent between the subject and the comparable sales.

 

[PL1957]

Its not their analysis ... its ours ... and we have to live by USPAP and one cannot produce a misleading report. Both investors and appraisers can do all of their calculations on a cocktail napkin, only ours must meet the requirements and regulations which govern us.

The last time I checked, I didn't see anything is USPAP that told me what method(s) of analysis I had to use. I would postulate that, ignoring methodology that market participants use because it's "on a cocktail napkin" in favor of technically accurate analysis is more likely to result in a misleading report than using the "cocktail napkin" approach.

I think I may need to add a "cocktail napkin" approach to my appraisals. If I can't explain my analysis on the back of a cocktail napkin, it probably doesn't represent actual market behavior.

 

[PropertyEconomics]

The last time I checked, I didn't see anything is USPAP that told me what method(s) of analysis I had to use. I would postulate that, ignoring methodology that market participants use because it's "on a cocktail napkin" in favor of technically accurate analysis is more likely to result in a misleading report than using the "cocktail napkin" approach.

I think I may need to add a "cocktail napkin" approach to my appraisals. If I can't explain my analysis on the back of a cocktail napkin, it probably doesn't represent actual market behavior.

You should have read the entire post .... you would have gotten more out of it.

 

[DTB]

I thought we are to reflect the actions of market participants not inflict what they should be doing?