Not deducting for vacancy.

[PL1957]

The problem I see with this is (and to which I've never received a satisfactory answer) just because one particular entity with certain needs will pay that price doesn't mean that the next entity will if it is vacated. In other words, the cap rate derived is based on an investment value, not a market value.

David, if it was one particular entity, I would agree with you, but my example was leased Walgreen's/CVS stores. These properties have a huge national market that is different and distinct from the market for fee simple, vacant, 10,000 square foot retail. You cannot confuse the two markets.

 

[PL1957]

Ah yes you must be referring to the young pin striped suit types who buy and sell between themselves using figures they generate within a market they largely control and at market rental figures dependant on the whim of the guru funds managers?............Of course I could be wrong.

Regardless of what the guru's in Sydney think, they have a long way to go before they control any market outside of Australia. They compete in the same arena as capital from the rest of the world, including other parts of the Pacific Rim and EMEA. They can no more control market rents or cap rates than they can make the sun rise in the west.

 

[The Warrior Monk]

David, if it was one particular entity, I would agree with you, but my example was leased Walgreen's/CVS stores. These properties have a huge national market that is different and distinct from the market for fee simple, vacant, 10,000 square foot retail. You cannot confuse the two markets.

The reason why I asked the question is that I know of several examples where a national tenant either vacated or went bankrupt, the building sat for years vacant, and in some of the cases was eventually bulldozed by the property owner.

 

[PL1957]

The reason why I asked the question is that I know of several examples where a national tenant either vacated or went bankrupt, the building sat for years vacant, and in some of the cases was eventually bulldozed by the property owner.

I've seen those as well - that's why some clients want to see a "go dark" value, assuming the tenant defaults, in addition to the leased fee value. There can be a significant difference between those values that may affect how the loan structured.

That's why it's important to know what interest the client wants appraised.

 

[PropertyEconomics]

I've seen those as well - that's why some clients want to see a "go dark" value, assuming the tenant defaults, in addition to the leased fee value. There can be a significant difference between those values that may affect how the loan structured.

That's why it's important to know what interest the client wants appraised.

Going Dark can have a tremendous impact on those tenants around the anchor in neighborhood centers. In the early 90s a KMart went dark here and essentially killed the center in the following 12 months. It can have a major impact on value and the risk associated with these properties is relatively high during these times, much like those of the early 90s.

 

[Artyman1200]

But how far do you reasonably take the worst case scenario train of thought without an overestimation of risk? Ultimately, do you say "you never know, so here's a 5% deduction" regardless of the tenant? Or do you determine the average vacancy for that property type and make that deduction?

 

[The Warrior Monk]

that's why some clients want to see a "go dark" value,

That was next thought, though not quite in those terms (I haven't heard that phrase before). From the lender/buyer's POV, it would make sense to have that value.

 

[The Warrior Monk]

FWIW, I was doing errands today, and I found out who the tenant in the big new building near my house is going to be...CVS.

It's a strange location for a store such as this...must be betting on summer beach traffic. Given that it's proximate to another CVS (with a better location), one of them likely won't be around in a few years.

 

[Howard Klahr]

As an example, in many, if not all markets, new Walgreen's/CVS drugstores are selling at cap rates that do not reflect a v&c. If you apply a v&c to your Walgreen's/CVS and use cap rates from sales that didn't have v&c deductions, you will be understating your value.

Investment value maybe, not market value. As one who has performed assignments on dozens of NNN lease deals as well as having underwritten loans where this asset type was the collateral, risk is risk and it is addressed in the analysis. You can put it in V&C, increase the cap rate or whatever, but it is factored in the analysis. You probably don't account for a management fee either. Given, it is a small one for this type of investment, but it is still an expense to the investor.

Prime territory for 1031's

Clearly you are not inferring that these transactions reflect the motivations of typical buyers? The tax implications and timing requirements have no impact on pricing here?

Or do you determine the average vacancy for that property type and make that deduction?

Yes, but by the term property type (NNN long term leased frestanding retail) does not equate to generic retail space. These type of deals are more "credit" based and will reflect a lower level of risk. Similar to anchor stores in a regional mall. You would not apply the same V&C factor to these leases as you would local in-line space or food court tenants.

 

[Mr Rex]

Based on what Walgreen's and CVS are paying in the market (above what is sustainable except with them as tenants), I'd hedge my bets. Last I heard, Starbucks is beginning to have a bitter taste. A change in Drug policy with a change of elected officials could be devastating to those long term leases of Walgreen's and CVS.:new_smile-l: