vacancy expenses

[justinschroeder]

If a property is fully leased on a NNN lease for the next 10 years, would you still apply a vacancy rate. Should there also be a deduction for taxes and other expenses for the times of vacancy. Estimated vacancy rate for the area is 12%

 

[Lost Cause]

How you would handle this will largely depend on the tenant's credit rating.

 

[GregoryK]

I have always deducted a nominal amount, say 2% to reflect the possible loss of a tenant through bankruptcy, etc. And from my experience this is fairly common in the appraisal of net-lease properties.

 

[Pittsburgh Pete]

How you would handle this will largely depend on the tenant's credit rating.

Agreed. Would definitely deduct expenses normally paid by tenant during the vacant period.

 

[Calvin the Airedale]

An awful lot can (and usually does) happen in 12 years.

I'm sure Lehman Brothers was a triple AAA risk when they inked the leases on their office space, even a year prior to their historic exit.

 

[Ken B]

An awful lot can (and usually does) happen in 12 years.

I'm sure Lehman Brothers was a triple AAA risk when they inked the leases on their office space, even a year prior to their historic exit.

No one wakes up in the morning and decides it is a good day to get hit by a bus.

My two cents is that if you use cap rates developed from sales of NNN leased property and don't apply deductions for vacancy and credit loss prior to calculating the rate, then don't apply deductions for vacancy and credit loss for the subject property in the direct cap pro forma. The cap rate developed in those sales infers expectations of vacancy and credit loss.

 

[Calvin the Airedale]

No one wakes up in the morning and decides it is a good day to get hit by a bus.

My two cents is that if you use cap rates developed from sales of NNN leased property and don't apply deductions for vacancy and credit loss prior to calculating the rate, then don't apply deductions for vacancy and credit loss for the subject property in the direct cap pro forma. The cap rate developed in those sales infers expectations of vacancy and credit loss.

Good point.

 

[Terrel L. Shields]

Uniformity of application....? If all else fails, call it the same on all of them.

 

[Mountain Man]

It's not just a deduction for vacancy, it's a deduction for rent loss such as late or non-payment of rent. Even with a 12 year lease, a prudent investor would deduct something for the risk of not receiving rent at some point.

 

[Vernon Martin]

Appraisal of triple net leased property

I think it does depend upon the tenant's credit rating as well as investor expectations. I don't think a buyer of a McDonalds lease is figuring on vacancy and credit loss. The same goes for Walgreens. On the other hand, investors have their doubts about Rite-Aid.

A few months ago I appraised a Blockbuster video store and I think the owner was hoping that I didn't know that Blockbuster already went through bankruptcy reorganization and its new owner, DISH network, is not obligated to continue the leases. Besides, there was a "for lease" sign in front of the store.