Who is the Best Next Tenant?

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Jack built a 5,000 square foot block building with a slab foundation on a high traffic corner, next to the regional mall. He put six glass rollup vehicle doors along the frontage wall, and installed plate glass on the side office and entry areas to accommodate his tire store tenant, who signed a 15+ year lease.

The recent recession claimed the tire store, and Jack was left with an empty building and little money for renovation. He painted and insulated the lower third of the rollup doors, backed them with drywall, and leased the property to a paint store.

The Assessor’s dilemma is how to categorize and then value this property, given a complete change in tenancy with only limited change in design and functionality. Contemporary vehicle service stores have higher lease rates than general commercial space, due to typically small size and specialized components (rollup doors, utility capacities, and a design that can accommodate equipment, such as automobile lifts).

Question: Who is the best next tenant?
Hint: The answer must be consistent with the precepts of Highest & Best Use.
Answer: Auto service.

Beware! Generic Design Syndrome

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One size does not fit all! If that empty template income model that came with your CAMA is the same one that has been sold to other jurisdictions, no amount of diligence in data collection will compensate for the lack of locally relevant design stratification.

Typical (but not always right) Conclusion #1: The larger the building, the lower the obtainable rent.

Typical (but not always right) Conclusion #2: The rent amount is the most important consideration to owners and tenants.

Example Area: A pipeline bulk storage market near a major interstate.

Market Reality: Rental rates for warehouses of 500,000+ square feet may actually be higher than rents obtained by facilities smaller than 500,000 square feet which are identical in other aspects. REITs (warehouse purchasers) and their tenants (online retailers, discount shopping clubs) desire economies of scale in operations…and those economies of scale are often more important to owners and tenants than the rental rate charged.

But what if your jurisdiction is not like the example pipeline market? And instead of a threshold, the bulk distribution market is completely linear? The typical generic answer does not apply in these scenarios either.

So beware! That same generic template is sold to the two very different markets. Does it apply to both those markets? To even one? Probably not, because it was designed by computer programmers with appraisal textbooks in their hands! There, I said it.

Unless the income model you are using is custom designed to match the locally relevant market stratification, accuracy will be compromised.

Unless those IT people are experienced in real estate and have physically researched your market and talked with local brokers and managers, generic design syndrome will occur. But you won’t feel it until the appeals start rolling in.