RETAIL CASE VALUATION PROBLEM (Using DIRECT CAPITALIZATION Methodology)

In this case problem, you will estimate the market value of a property by the income capitalization approach. Round all figures to the $1.

You have been asked to appraise/value a small one-story commercial building located in a neighborhood shopping center. The building is about 20 years old and is divided into four separate stores, all of equal size. Each store pays a yearly rental of $10,200, which is well in line with comparable properties analyzed.

The seller of the property lists the following items of expense for the previous year: Real estate taxes - $4,000

Insurance - three-year policy - $3,000 Repairs and Maintenance - $2,800 Legal and Accounting fees - $550 Miscellaneous expenses - $500

In addition to the above expense listing, you obtain the following information from your appraiser:

Tenants pay for their own water, heating, electricity and garbage removal.

Repairs and general maintenance should be based on 12 percent of EGI.

Miscellaneous expenses should be increased to 2 percent of PGI.

The records of property managers indicate that vacancy and collection losses in the area run about 4 percent.

A new roof, costing $2,000 and having an average life of 20 years, was installed last year.

The gas furnace in each store will carry a 10-year guarantee and will need to be replaced for $950 (each) at the end of the warranty period.

Recent land sales in the area indicate that the land value of the subject

property should be estimated at $55,000.

You have determined from banks in the area that 75 percent of the value of the property can be borrowed at 11 percent interest, and equity money for this type of investment requires a 13 percent return.

The building is 20 years old and appears to have depreciated about one-third of it's "REL" (Remaining Economic Life).

SOME KEY TIPS:

You will have to set up replacement reserves for the roof and for the store furnaces.

Also, you will need to calculate/establish CAP RATES for the building and for the Land.

Finally, you will calculate and add to the building cap rate, a capital recapture rate, which you will use to recover your investment in the building.

A. On the basis of the information provided on the previous page, reconstruct the operating statement.

B. Determine the appropriate capitalization rate(s) for the land and the building.

C. Estimate the total property value.