Hot Spot

What is a hot spot?

  1. Physical place or mobile device providing internet access.
  2. Skin irritation common to bored pets (poor Fido).
  3. The real estate that everyone is frequenting (often a restaurant, club, or resort).

The hot spot in your jurisdiction is real estate that needs to be equitably assessed for property tax purposes. To do your assessment, you must confirm why it’s a hot spot by determining if the source of popularity is endemic to the real property. Or… is it hot because of branding, management, or the skill & popularity of the business operator.

Let’s discuss a hotel first. A new hotel situated first off the interstate highway may well be hot because of location: an attractive, super functional building for the intended use. Some of the largest and most successful hotel brands create physical enhancements to properties which add lasting value beyond ownership or franchise affiliation. The factors that render this as a hot spot relate to the real estate and should be considered in your analysis.

Next, think about a restaurant… if the property “everyone is going to” is frequented because of the popularity of the chef, this should be regarded for assessment purposes as room temperature. Not hot!

Posted in Real Life

Revolving Rents

Retail rents mostly inch up slowly, don’t they? So, should you just plug current rents into your model and coast for a few years by indexing them up every so often? No! And here’s the reason why:

Correct analysis & application of rents must be based on close monitoring of the market, at least for the retail sector. There are 24 square feet of retail space per person in the U.S., compared to five in the U.K., four in France, and three in Spain and Italy per the International Council of Shopping Centers.

Yet, look around you. A bunch of retail is currently being built in the U.S., with a lot of it proximate to stores soon to be vacated as a result. That famous American pioneering spirit (move to improve) is still very much alive here. But this does result in significant fluctuations in neighborhood vacancy, since fickle shoppers tend to visit only the latest in bricks & mortar.

So yes – the highest rents do mostly inch up, but… they also move from area to area, causing the rest of the market to correct accordingly.

Rents correlate directly with supply and demand, and go both ways fast.

Posted in Market Trends

Dixie & Her Uncle’s Appeal

Dixie Phair, Commercial Real Property Analyst for Any Municipality County, would definitely have recused herself, but the only other staff member with commercial experience is on extended leave.

So, a somewhat close family member (Jack Phair, Dixie’s uncle) is across the conference room table from Dixie, with the Hearing Officer’s transcription in full operative mode:

Jack: I don’t get it. My store is the same it’s always been, yet the taxes over the past five years have shot up and my tenant is upset!

Dixie: Sir, would you agree that the value of your retail property has risen significantly over this period?

Jack: Well sure, Missy, the market has come back after the recession. And it helps that the city rerouted Main Street right past my storefront. Both of those occurrences were not of my doing, though!

Dixie: Sir, we certainly agree you are not at fault, but please consider that your tenant benefits from not only the improved market in general, but also the greatly increased exposure from the relocation of Main Street.

Jack: Well if they have benefited, they haven’t told me. But it does make sense, I grant you.

Dixie: Just to clarify how the Assessor has tried very hard to equitably assess retail property over the years, I have prepared this simple chart of rents, vacancy, and cap rates used in our income model for your property in the first four recession years:

Year Rent Per
Sq Ft
Cap Rate
2008 $14.50 8% 7.75%
2009 $14.50 10% 8%
2010 $13.50 12% 8.5%
2011 $13.00 14% 9%

My point is that your tenant was given appropriate relief during the down years based on locally verified market data relevant to the property type, tenant design, size, condition, appeal, and location. Also, please don’t forget how the immediate location has changed.

Jack: Actually, this is good information. May I show them this? I think it should cool them off. Appeal withdrawn, Missy!

Another crisis averted through application of the principle of equity.

Posted in Uncategorized

Buyer + Seller = Market

Buyer & Seller… sounds like oil & water, right? But they coexist, as naturally as the seemingly opposite cactus spines & flowers.

Real property is always transacted at the right price for the buyer and the seller. The price is right for the buyer (achieves the desired objective of obtaining ownership) and the seller (it’s the price the seller is willing to accept).

In a completed real estate transaction, a done deal represents:

The right price for the buyer because it…

  1. is less than, or at least the equivalent of, what the property will generate in return,
  2. contributes to solution of a perceived need at the time of purchase,
  3. falls at, or less, than buyer’s maximum affordability. Continue reading
Posted in Real Life

Not Just Washers & Dryers

It’s easy to think that laundromats can be readily located into most retail spaces by simple installation of personal property (washers, dryers, coin & soap vending, and maybe an extra utility sink). But much more than personal property is involved in laundromat facilities:

  • Much greater electrical capacity than typical retail use.
  • Much greater plumbing capacity than typical retail use.
  • Heavy security door and one-way glass for the on site office, to protect cash/coin storage for replenishment of change machines.
  • Extra thick concrete washer pads to mitigate extreme rotational stress of commercial washers.
  • If a basement or lower floor underlies the laundromat, often extra structural steel is needed below to stabilize the floor to protect against washer rotational stress.

In most of these properties, the extra real estate components are tenant improvements. The rub for assessors is that the cost approach recognizes the improvements, but when using the income approach, you can’t always assume that the next tenant will be another laundromat.

Posted in Market Trends

Getting That Last Dollar (Not)

Given that money is involved, tax appeals are often contentious affairs. This can be uncomfortable for some, so I have a suggestion aimed at making it a bit easier.

I was originally trained as a rights-of-way appraiser for highway land acquisition. As you know, highway acquisitions involve folks who, of course, didn’t ask for their property to be appropriated. We were taught to always treat the property owners with respect and give them the benefit of doubt at every opportunity.

During the rights-of-way appraisal inspection, we seized upon opportunities to demonstrate fairness in land and improvement value calculation. Property owners could easily see that we were trying to be as fair as possible; this usually went a long way toward making the acquisition process more acceptable.

Here are three examples of how to actively demonstrate similar fairness in tax appeals when using the income approach for assessment determination:

  • Select a market rent that all parties will immediately judge as readily achievable in the local market.
  • Make sure that a market based vacancy factor is applied, even if the appellant has not included one in their own analysis.
  • Give up a quarter point on your cap rate selection… how precise can we be, really?

The intent is for the appellant to quickly recognize your effort to achieve equity. This may soften the conversation.

Posted in Uncategorized

What’s the Deal with Stratification?

Many of these posts are intended to assist the newer Assessment Professional in learning commercial and industrial (C/I) property valuation. Some folks have previously mastered the basics of single family residential (SFR) valuation, so the learning curve can be shorter since they already understand the stratification process.

The biggest difference between SFR and C/I is the complexity of stratification, as C/I contains many uniquely diverse property types. But both realms begin the stratification process with property type and subtype.

The relative desirability of location is specific to both type and subtype of use. For example, lodging and industrial developers rarely compete for the same sites, as hotels and warehouses are completely different property types. Similarly, the SFR subtypes of tract homes and large estates have different locational needs.

As in SFR where each jurisdiction is a collection of neighborhoods, C/I refers to submarkets. When valuing SFR, you may find three SFR neighborhoods rated the same among a collection of twelve neighborhoods. Similarly, there could be three hotel submarkets in one jurisdiction comprised of interstate, CBD, and university locations with the latter two rated identical in terms of locational desirability.

In both SFR and C/I, stratification only begins with type of use. Every other aspect of the comparison process depends on maintaining consistency of type. Most properties are not average in all respects – location, quality of construction, design, and functionality all combine to make the comparison process meaningful.

A winning hand in valuation starts with understanding stratification.

Posted in Uncategorized

How Rent is Paid at QSRs

Note from Tim: We do not rely on store sales in commercial real estate valuation. With that understood, this post is an interesting explanation about the relationship between sales and rents.

We all collect local market data such as rents for quick serve restaurants (QSRs) to aid in an income-based analysis. Since a well regarded national restaurant tracking organization has just published recent QSR store sales data, we can check general relationships of annual restaurant sales and rent allocations to see if the numbers make sense… and they do!

Using an industry standard factor of rent = 7% of annual sales, we can estimate the high and low rent thresholds that should be apparent in rent surveys. This is certainly a nationally generalized and inexact methodology, but it can serve to roughly validate what we see out there. The methodology uses the assumption that stores range in size from 2,000 SF to 4,000 SF. A summary of the published data:

Product Type # of Brands Average Annual Sales Per Location
Burger 13 $1,689,000
Chicken 9 $1,816,000
Ethnic 7 $1,391,000
Pizza 5 $803,000
Sandwich 8 $1,340,000
Seafood 1 $1,059,000
Snack 7 $819,000

The data suggest a rounded average annual sales range of $800,000 to $1,800,000 per location.

Using the general 7% rent factor returns a rent allocation range of $56,000 to $126,000.

Finally, application of the store size assumption yields the following results:

Store Size Average Rent Range per SF
2,000 SF $28.00 to $63.00
4,000 SF $14.00 to $31.50

As it happens, we commonly see similar rent ranges, with the low end extremes from poorly located properties and the highest rents found at stores within high traffic malls. The food sales have to justify the rents.

Posted in Market Trends

Dual Agency Negotiator

Most states by now have adopted strict rules for real estate professionals establishing the concept of “agency”. Simply, the agency concept commands brokers to pick a side in negotiation, and make that pick obvious to the public.

So, either you are an agent for the seller or an agent for the buyer. If you choose both, a precarious tightrope has been woven to lawfully complete a transaction.

Such dual agency is now so fraught with performance tests as to render the additional fees not worth the trouble, as solemnly lamented by the old timers.

But as an Assessment Professional, your careful, concurrent attention to both the public and property ownership positions is the path to equity.

The goal is to achieve a result described by all as reasonable, or at least minimally harmful. You can happily embrace a dual agency role!

Posted in Real Life

Big Box Science

The big box ownership argument that their buildings largely represent branding efforts, which in turn causes inherent obsolescence, always mystifies me. Those big box owners would have you believe the obsolescence diminishes their property both coming and going!

First, the initial expenditure for the (largely unspecified) additional features so important for brand identification will never be recaptured… yet, they are critical for operation of their business. So, the big box hardware retailers would like us to believe that the actual big box store itself has many unique aspects that are intrinsically ingrained in the structure. Apparently a hammer must be purchased in a highly curated environment.

Then, when it is time to sell the property, the results of that initial expenditure will largely render the property unmarketable due to their uniqueness. What appears to the uninitiated as an unadorned exterior wall is actually a highly technical architectural feature? With subliminal suggestive capability too scientific to explain to this or any audience?

When the large hardware big box store is sold to a non-hardware retailer, will customers seek out the hammer aisle? No way.

Posted in Case Studies