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So Much Data To Choose From

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Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
I'm appraising a small free-standing retail building in a smaller market. It's about 10 years old and being used for general retail by the owner. However, it was originally built a donut shop and still has all of the infrastructure for a restaurant use (plumbing, electrical, bathrooms, etc.) including a drive-thru lane and window. Obviously I'm not going to find a lot of comps of former drive-thru restaurants converted into retail. In fact after days of scouring the market, calling every commercial broker in town, and checking multiple databases I have come up with a grand total of three sales and a couple of leases.

Sale 1 is a full service restaurant that's twice as large but is only a half-mile down the street and sold 18 months ago. - $142/SF

Sale 2 is a 50-year two-tenant building occupied by a dentist that was purchased by a partial owner/user a couple of months ago, just down the street. - $77/SF

Sale 3 is a C-Store/gas station purchased by an owner/user who had to upgrade the pumps but it included all FF&E (tanks, coolers, canopy, etc.) and sold almost three years ago, just down the street. - $132/SF

*sigh* it's ok though because I have all the way until Monday to finish this when I leave for two weeks of National Guard training.

Oh, and the owner reported multiple unsolicited verbal offers ranging from $160 - $180/SF. Sure am glad I won the bid on this one [/sarcasm].
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
Been there, done that, got the t-shirt.


The people pimping Big Data and thinking the adding machine will make us obsolete in the next 5 years would cry if they had to work with the datasets we routinely work with.
 

AMF13

Elite Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
This is why ya make the big bux. :leeann:
Enjoy.
 

jay trotta

Elite Member
Joined
Feb 8, 2004
Professional Status
Certified Residential Appraiser
State
Connecticut
Been there, done that, got the t-shirt.


The people pimping Big Data and thinking the adding machine will make us obsolete in the next 5 years would cry if they had to work with the datasets we routinely work with.

George, sometimes you have a way with words, that kills the rest of the sentence; "Big Data Pimping" definitely had to wipe the screen, am giving you a AAA rating in the moodless arena.
 

George Hatch

Elite Member
Gold Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
California
LOL

I live to serve
 

leasedfee

Member
Joined
Oct 14, 2007
Professional Status
Certified General Appraiser
State
Colorado
small free-standing retail building in a smaller market.. . . used for general retail by the owner. . . . . still has all of the infrastructure for a restaurant use. . . . find a lot of comps of former drive-thru restaurants converted into retail.
I would comp it has a general retail as the likely next user. My concern would be that you should not restrict yourself to find converted comps, but should stay single-tenant retail of identical size/age as the data allows.

In the sales comparison approach, the restaurant improvement up-grades just become super-adequate and are ignored using such comps. In the cost approach the restaurant cost net of physical deprec may be $250/sf and retail cost net of physical depr may be $200/sf, and thus the functional obs would approach $50/sf. A property that can't support a restaurant longer than 10 years may not be able to support it in the future anyway. To a possible restaurateur, the retrofit cost of 10 yr elements renders the value of restaurant elements fairly minimal in value, so only a minor premium over converting an originally retail building. So even if there is still a premium of sorts (i.e., functional < $50/sf differential) it is unlikely (a la fundamental analysis via reasoning of past behavior) be enjoyed/utilized until say 10 years from now, so you'd hit the premium with a PV factor and that'd further obliterate a premium towards $0, i.e., functional is so nearly $50/sf that let's just call it that. Some guys might want to have a small cost to cure to board-up and reconfigure the drive-through window. I've seen it both way and it might depend on whether not the neighborhood is posh or scummy. Such costs may be so minimal that is well masked by the high-to-low spread in the sales comps.
 

leasedfee

Member
Joined
Oct 14, 2007
Professional Status
Certified General Appraiser
State
Colorado
For what it's worth, my thoughts:

Sale 1 is a full service restaurant that's twice as large but is only a half-mile down the street and sold 18 months ago. - $142/SF
Given the similar location and recent sale, I'd keep this one. Large economic downward adjustments for restaurant H&BU improvements. Upward adjustment for size.

Sale 2 is a 50-year two-tenant building occupied by a dentist that was purchased by a partial owner/user a couple of months ago, just down the street. - $77/SF
The comp's long-lived components (foundation, structure, electric, plumbing) are inferior by 40 years. Depreciation Adjustment: Long-lived components constitute, what, 20% to 30% of the structure's cost multiplied by a building allocation ratio say 70% and you find that the long-lived constitute between 14% and 21% of overall value -- but the subject being about 10 years old isn't new either. So the comp's extra depreciation versus the subject would be (50 - 10)/ ll-life of 100 up to 40% of the 14% to 21%, or an adjustment in the range of 5.6% to 8.4%, then round as appropriate.

The comp's medium-lived components, like boilers, roof, landscaping are likely to have been been renovated in full or part. Unlikely to have absolutely no renovations. Med lived components constitute say 30% of cost so x 70% land allocation for about 20% of the total value difference. So this one is hard to gauge. It may be newish, partial, or noon, and that constitutes a range depending on the subject between 0% and 20%.

The comp's short-lived components wear out quickly. Carpet in 5-7 years; paint 5 yrs; interior walls 15. Has the comp been renovated to feel new or was it last renovated 2 decades ago or is it a cheapskate owner working like it was 1967. Similar logic as above, though short-lived components constitute 30% to 40%+ for nicer properties, and less than 30% for warehouse like retail.

Next adjustment issue: Is the dentist and other user more office; office-retail; or retail in location? This may require a location adjustment at minimum, or an economic adjustment to the improvement for inferior H&BU. Sometimes we see this happen when traffic becomes extremely heavy (or a road is re-routed) and SFR experiences external obsolescence, but as the shifting H&BU becomes office-retail of secondary retail they becomes an accountant, insurance agency, niche attorney, or astrologer's. It may not just be land value that changes.

Sale 3 is a C-Store/gas station purchased by an owner/user who had to upgrade the pumps but it included all FF&E (tanks, coolers, canopy, etc.) and sold almost three years ago, just down the street. - $132/SF
Don't really like this one as it is a different H&BU at this time. I would rather you go wider geographically or further back in time to find something that looks/feels like what the subject is/would be used for. If you were in the buyer's/tenant's shoes (general retail user) and the broker showed you this property you'd look at them sideways. Yes, someday the c-store will be a karate studio or sandwich shop but that is many years away.
 
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Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
For what it's worth, my thoughts:


Given the similar location and recent sale, I'd keep this one. Large economic downward adjustments for restaurant H&BU improvements. Upward adjustment for size.


Its long-lived components (foundation, structure, electric, plumbing) are inferior by 40 years. Depreciation Adjustment: Long-lived components constitute, what, 20% to 30% of the structure's cost multiplied by a building allocation ratio say 70% and you find that the long-lived constitute between 14% and 21% of overall value -- but the subject being about 10 years old isn't new either. So the comp's extra depreciation versus the subject would be (50 - 10)/ ll-life of 100 up to 40% of the 14% to 21%, or an adjustment in the range of 5.6% to 8.4%, then round as appropriate.

Next adjustment issue, is the dentist and other user more office; office-retail; or retail in location?


Don't really like this one as it is a different H&BU at this time. I would rather you go wider geographically or further back in time to find something that looks/feels like what the subject is/would be used for. If you were in the buyer's/tenant's shoes (general retail user) and the broker showed you this property you'd look at them sideways. Yes, someday the c-store will be a karate studio or sandwich shop but that is many years away.

Appreciate the comments. I agree that Sale 3 is not really comparable and I will probably not do any more than mention it occurred just to show I did my due diligence. I do have one other sale but it's multi-tenant retail, far superior location and tenancy, and over four years old.

Sale 2 is literally just a few buildings down and the front suite was used for retail in the past, last tenant was a video rental store. The buyer plans to use it for a real estate office. Dentist is in a larger suite in the back that faces a side street. Still, beggars can't be choosers so I'll be using this one.

The owner seems to think that anything that doesn't have a drive-thru isn't a comp, but I might have to go back a decade just to find another sale with a drive-thru. Incidentally one of the brokers I spoke too who has always been helpful in the past mentioned how a client showed him a recent appraisal in this market where the appraiser used a sale from 2007. I don't think I'm that desperate yet. I'm amazed a client accepted that.
 

leasedfee

Member
Joined
Oct 14, 2007
Professional Status
Certified General Appraiser
State
Colorado
Sale 2 is literally just a few buildings down and the front suite was used for retail in the past, last tenant was a video rental store. The buyer plans to use it for a real estate office.
Excellent.
Sale 3 is not really comparable and I will probably not do any more than mention it occurred just to show I did my due diligence.
One sentence should cover that.
The owner seems to think that anything that doesn't have a drive-thru isn't a comp, but I might have to go back a decade just to find another sale with a drive-thru.
Does the tenant/user use it for a drive-through. If it is so valuable, then why the switch in H&BU? Because it didn't have value and wasn't the H&BU. You don't get the premium unless it warranted -- and see my related comments in my first post. In my market, switching H&BU wouldn't occur except in an old property or severe market fluctuation as the market recognizes and pays for the restaurant improvement premium, and the owner would only consider a restaurant tenant.
. . . a recent appraisal in this market where the appraiser used a sale from 2007. . . . . I'm amazed a client accepted that.

I've done it. I have commented on this elsewhere on AF. If it sheds insight into the shallow market's behavior, then I don't get upset of it. If the market was stronger and had velocity, then you'd have more recent sales and upward market conditions. Old sales tell me that the market is flat, possibly declining. Thus the c-store sale comp may not be reflective of general retail market conditions even if the comp sold in 2017. You sometimes need to explain the economic logic as I just attempted to do.
 

Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
Excellent.

One sentence should cover that.

Does the tenant/user use it for a drive-through. If it is so valuable, then why the switch in H&BU? Because it didn't have value and wasn't the H&BU. You don't get the premium unless it warranted -- and see my related comments in my first post. In my market, switching H&BU wouldn't occur except in an old property or severe market fluctuation as the market recognizes and pays for the restaurant improvement premium, and the owner would only consider a restaurant tenant.

I've done it. I have commented on this elsewhere on AF. If it sheds insight into the shallow market's behavior, then I don't get upset of it. If the market was stronger and had velocity, then you'd have more recent sales and upward market conditions. Old sales tell me that the market is flat, possibly declining. Thus the c-store sale comp may not be reflective of general retail market conditions even if the comp sold in 2017. You sometimes need to explain the economic logic as I just attempted to do.

The owner has not used the drive-thru as it is a general retail business. However, he remarked he's glad he never removed it as all of the unsolicited interest in the last year has been from people wanting to use the drive-thru. One was a donut shop that ending up leasing space in a two-tenant retail building a mile down the road that included a drive-thru (was able to confirm as a rent comp), the other was somebody who wanted to do smoothies and sell vitamins, etc. as there is a large gym next door. There's not a lot of drive-thru spaces in this corridor.

It sounds like the original owner/builder overspent and went out of business within 18 months and the current owner was able to get the property in a short-sale for well under what it cost to build. That was around 2007 so perhaps the demand for restaurants wasn't as great then. That's a good point that if restaurant was the H&BU then a restaurant owner should have been willing to pay more.

There's been a lot of national retail development in another part of town (main retail corridor) over the last few years but that stuff is selling for $500+/SF at a 6% cap. My subject is located in the second best retail corridor and it's basically where all the locals who can't afford to be in the best area have settled.
 
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