Warehouse Valuation

[runner52]

I was asked to give an "As Is" value to a single tenant steel frame warehouse. I am conducting an Income Approach and Sales comparison Approach. The building was built in 1986 and in average condition. No deferred maintenance. I received an email from the lender yesterday asking for an "At Completion" value due to some improvements that will be made to the building by the builder. The improvements are as follows:

$30k on raising the floor 8-10 inches (for 2,000 Sq feet), around $7K to cut into the driveway to make a loading dock, and $13k to bring 3 phase electricity to the building.

SBA wants an "At Completion" value but both the lender (and myself) dont think the improvements are really going to add much to the property's "market value" yet I still need to give an "At Completion" and then "As Is" value. This is what I am thinking of doing:

--Note the improvements under the Description of Improvements
--Up the lease rate and $/SF In the Sales Comparison Approach (slightly)...the only fair comparison I think I can make is whether or not the comparables have phase 3 electric but likely they will since they are all industrial uses. I can't measure the benefit of the driveway and raising the floors other than they do improve the subject (somewhat) for its use.
--Give an "At Completion" value and then deduct the cost of improvements for an "As Is" value.

Thoughts? Thank you.

 

[Michael S]

There are two ways to look at this. The first is to value the property "as complete" then back out the costs of renovation (including soft costs and any profit if applicable) to conclude the "as is" value. However, the approach assumes that the renovations are adding value to the property. I just completed an appraisal where the as is value was about $800k and the as complete and stabilized was about $2.8 million with the renovations estimated at about $1 million. Obviously it was financially feasible as the developer is going to pretty much double his investment. In your case, is the highest and best use to renovate this property or is it functional as is? Would the most likely buyer come in and spend $50,000 on renovations if it won't return at least that much? Probably not.

You may need to value the property as is with one set of comparables and then value it separately as complete with another set of comparables. Given the relatively minor renovations you may end up using the same comparables and just slightly different adjustments. Your conclusion might be that the property is worth $130k as complete and $100k as is. In which case, spending $50,000 to increase the value by $30,000 is not the highest and best use. Cost does not equal value and it's likely that these renovations will not add $50,000 in value.

 

[Howard Klahr]

--Note the improvements under the Description of Improvements
--Up the lease rate and $/SF In the Sales Comparison Approach (slightly)...the only fair comparison I think I can make is whether or not the comparables have phase 3 electric but likely they will since they are all industrial uses. I can't measure the benefit of the driveway and raising the floors other than they do improve the subject (somewhat) for its use.

What is the basis of the increase in rental rate? The issues you discuss, electrical service and loading facilities are elements of comparison in warehouse appraisals. Why did you not consider these items before the lender commented to you? Have you considered the fact that the costs to renovate the property might not be recovered/improve (i.e. feasibility) the value at all?

 

[JTip]

$30k on raising the floor 8-10 inches (for 2,000 Sq feet)

Easier for short people to change the light bulbs? Keep the $30k and buy them some of those drywall stilts for $100.

Seriously though, what's the purpose/commercial benefit of raising the floor?

 

[Gobears81]

I didn't see a mention of the building size, but it might be such that upgrading to three phase and adding a loading dock is more of curing a deficiency than anything else. I am not going to suggest whether these items are in fact feasible of course, but I would examine whether your comparable sales and comparable rentals have three phase, how many dock doors they have, etc. to compare.
If the proposed improvements aren't feasible, than you are probably going to be too low on your as is value if you deduct a cost to complete. It's a pain, but you might need to do two separate adjustment grids and two income approach values.

 

[Terrel L. Shields]

I didn't see a mention of the building size, but it might be such that upgrading to three phase and adding a loading dock is more of curing a deficiency than anything else.

Should be a rent differential due in access to dock. I would look for that first. I know an old building that rents higher than a similar warehouse owned by the same person. All because of docks making truck loading much faster. Same renter , greeting card printer.

 

[Howard Klahr]

Seriously though, what's the purpose/commercial benefit of raising the floor?

I am assuming that this relates to a portion of the property that will have computer equipment.

 

[DREA Dean]

Jeez, I hate when I'm asked to give a "value upon completion" for relatively minor upgrades/renovations. This is a 30 year old industrial building. By that age, it's common to make various alteraitons, and it's pretty darn hard to fully analyze all of your sale and rent comps for such things. I can't imagine a market that is that efficient and perfect to be able to develop two different sale and rent analyses.

I would likely look at the proposed improvements and just form a judgement of whether they are needed/desirable and improve the appeal and functionality of the property. If so, add this amount to your already-concluded market value.

 

[NachoPerito]

To have 3 Phase power is pretty necessary and I imagine that the $13k is necessary and adds value equivalent to cost if all the comps have it.

I know Dock height loading is preferable, but by how much? I don't see people converting a building to dock height loading hardly ever so I don't think the cost is justified for the typical user. $30k to raise the floor? Is this to add in the dock height loading, for flood zone, or what? I need more information.

 

[Howard Klahr]

raising the floor 8-10 inches (for 2,000 Sq feet),

This has nothing to do with dock height

3 Phase power is pretty necessary

Why would 3-phase power be necessary for a warehouse utilized a storage?

add this amount to your already-concluded market value.

I would approach it the other way around. In theory the improvements would be moving the building toward the ideal improvement and therefore that is how the comparables should be evaluated for comparison. The costs associated with the necessary improvements would be deducted to get the as is value. In theory the improvements are curing a deficiency. If not, then it brings in question the economic viability of doing the improvements in the first place.