Not deducting for vacancy.

[Michigan CG]

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:

Walgreen's and Starbuck's are totally different. Walgreen's has 20-30 year leases selling at 6.5% in new free standing buildings. Starbucks going into strip malls and many are franchises.

 

[PropertyEconomics]

Walgreen's and Starbuck's are totally different. Walgreen's has 20-30 year leases selling at 6.5% in new free standing buildings. Starbucks going into strip malls and many are franchises.

Starbucks doesnt sell franchises, EXCEPT, to corporate clients in Universities and large retail book stores. To my knowledge no freestanding or strip center locations are franchises. All are company owned.

 

[Michigan CG]

Starbucks doesnt sell franchises, EXCEPT, to corporate clients in Universities and large retail book stores. To my knowledge no freestanding or strip center locations are franchises. All are company owned.

I stand corrected, but I would still throw my money at a Walgreen's property vs. a Starbuck's any day.

 

[Artyman1200]

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.

Right, so if you deduct for vacancy, as opposed to adjusting the cap rate, your deduction is either supported by interviews with buyers or is mostly arbitrary. Either way I typically use a minimal deduction (3%-5%).

 

[Howard Klahr]

How about looking to the market? Let's say you have a lease term of 10 years. Based upon your research typical marketing time for properties of this type is 9 months to lease if it was vacant. Therefore, a reasonable vacancy rate would be 9 months divided by 129 month (total time = lease term plus marketing period) = 6.98% Since your property is currently leased, there is some probability of renewal (i.e. greater than zero). If so, apply your renewal probability to the vacancy rate (6.98% x 50% = 3.49%).

If there is a favorable renewal option, then the renewal probability will likely be higher. If the property is older and suffers from some functional issues, the renewal probability might be a bit lower.

Now this just reflects a vacancy rate. You need to incorporate a credit loss factor also. Consequently, in this example an overall reasonable allowance for vacancy and collection might be say 4.0%. This would be reconciled with the information you obtain from interviews of property managers, owners, etc.

Now it is not a hard fact that can be verified through public records, but I believe that the reasoning outlined here would not be considered arbitrary either.

Hope it helps.

 

[PropertyEconomics]

How about looking to the market? Let's say you have a lease term of 10 years. Based upon your research typical marketing time for properties of this type is 9 months to lease if it was vacant. Therefore, a reasonable vacancy rate would be 9 months divided by 129 month (total time = lease term plus marketing period) = 6.98% Since your property is currently leased, there is some probability of renewal (i.e. greater than zero). If so, apply your renewal probability to the vacancy rate (6.98% x 50% = 3.49%).

If there is a favorable renewal option, then the renewal probability will likely be higher. If the property is older and suffers from some functional issues, the renewal probability might be a bit lower.

Now this just reflects a vacancy rate. You need to incorporate a credit loss factor also. Consequently, in this example an overall reasonable allowance for vacancy and collection might be say 4.0%. This would be reconciled with the information you obtain from interviews of property managers, owners, etc.

Now it is not a hard fact that can be verified through public records, but I believe that the reasoning outlined here would not be considered arbitrary either.

Hope it helps.

Howard ... and as a final thought, the same rate (or similar analysis) should be applied to the reported incomes of your comparable sales (assuming they have no vacancy factor) in order to reflect the accurate and comparable overall rate as indicated by your sales.

 

[Howard Klahr]

PE,

I understand your point about being consistent in your analysis of sale comps and the subject property and I agree.

 

[PL1957]

Howard ... and as a final thought, the same rate (or similar analysis) should be applied to the reported incomes of your comparable sales (assuming they have no vacancy factor) in order to reflect the accurate and comparable overall rate as indicated by your sales.

PE, I understand what you and Howard are saying and agree for the most part. My concern is with what happens to appraiser's credibility when we are "more correct than the market". A great illustration of this is in the valuation of NNN deals.

A broker can provide the appraiser a legitimate list of 20 Walgreen's sales that traded at overall rates between 6.25% and 6.5%, with no deduction for vacancy, management or reserves. The appraiser takes these sales, along with the subject, and "adjusts" the income for v&c, management and reserves, and ends up with "adjusted" cap rates of 5.75%-6.0%, as being the "technically correct" numbers. The reader of the report (probably skimming as usual), comes to the conclusion that the appraiser is "just hitting numbers" because his OAR if below that of all the sales, because market participants are reporting these same sales at the 6.25-6.5% levels.

I think our role is to mirror the market, not "correct" it.

 

[PropertyEconomics]

PE, I understand what you and Howard are saying and agree for the most part. My concern is with what happens to appraiser's credibility when we are "more correct than the market". A great illustration of this is in the valuation of NNN deals.

A broker can provide the appraiser a legitimate list of 20 Walgreen's sales that traded at overall rates between 6.25% and 6.5%, with no deduction for vacancy, management or reserves. The appraiser takes these sales, along with the subject, and "adjusts" the income for v&c, management and reserves, and ends up with "adjusted" cap rates of 5.75%-6.0%, as being the "technically correct" numbers. The reader of the report (probably skimming as usual), comes to the conclusion that the appraiser is "just hitting numbers" because his OAR if below that of all the sales, because market participants are reporting these same sales at the 6.25-6.5% levels.

I think our role is to mirror the market, not "correct" it.

Are you appraising a walgreens?
Our role is to mirror the market, and everyone keeps throwing walgreens into the picture. remove them and you will understand the majority of the posts. If you are appraising a walgreens then I think you know the methods that should be used.

 

[Mr Rex]

Walgreen's and Starbuck's are totally different. Walgreen's has 20-30 year leases selling at 6.5% in new free standing buildings. Starbucks going into strip malls and many are franchises.

I wasn't comparing Starbucks leases to Walgreen's, just pointing out that the market decides the success or failure of businesses. That's why its called market value. I guess for a Walgreen's, its Walgreen value, not market value.