A Proper Opinion of Value

Often in our commercial real estate practice we’re asked for our opinion of the value of a commercial asset. These can be as loose as a “back of an envelope” guess to a full blown appraisal conducted by an MAI appraiser. If you’re unfamiliar, the MAI designation is for a certified appraiser and member of the Appraisal Institute who has met strict testing, standards and experience requirements. Minimum requirements include: Meeting the standards and ethics requirements, Completing an approved 4 year degree, Passing all Appraisal Institute required exams including a comprehensive examination, completing 4,500 hours of specialized work, completing a demonstration appraisal report, and finally submitting an application for review and approval. Generally, an MAI appraisal is required if financing is being originated or if one of the title holders has died - necessitating a “time of death” appraisal. The commercial real estate brokerage profession works arm-in- arm with appraisers. You see, we track key data which is included in an appraiser’s work - such as lease comps. Generally, in return for our cooperation, an appraiser will share her data with us. Sometimes we’ll even get specifics on the appraisal task - address, nature of the value assignment and results. But today, I’ll focus on the appraisal’s little sister - the Broker Opinion of Value and what elements it contains. by the way, these are excepts from a live opinion. The names were changed to protect the innocent. 
 
Scope of the Assignment: Something like this…We were engaged by a local property owner to provide a broker opinion of value. The real estate was purchased in 1997 for the purpose of housing their operating company. Now sought is an opinion of the value of the real estate for internal purposes. 
 
Property Description:
General:
444 Boardwalk offers approximately 100,000 square feet of warehouse space suitable for manufacturing and distribution purposes. It features both ground-level and dock-high loading doors, providing flexibility for various types of operations. 24 foot minimum warehouse ceiling clearance is advantageous for storing and handling large inventory or equipment. With 1200 amps of power, the property can support a variety of industrial manufacturing uses. .33 over 3000 sf feet sprinkler system limits the stacking height of some commodities. Ample parking spaces - approximately 200 - for employees and visitors are provided. A fenced yard adds security, staging and storage options. A strategic location offers excellent access to Los Angeles and Orange counties. 
Specific amenities:
Outlined in this section will be the specific features - square footage, % of office, etc. 
 
Methodology: Here a description of the way in which you determined value is described. It could read like this - Our understanding of the Orange County California sub-market dates back to 1984 when we began our career at Lee & Associates. Our company, and specifically our team, has been very active in the industrial arena - leasing and selling buildings of all sizes to a variety of investors and owner occupants. We consider ourselves to be market experts in this asset class of commercial real estate. To properly estimate the value of 444 Boardwalk, we analyzed four specific segments of the market - comparable sales, comparable leases, available sales, and available leases. A comparison was drawn to buildings that closely approximate the amenities contained in 444 Boardwalk. We only included deals that afforded specific transaction points. Additionally, we considered the types of buyers that would be in the market to purchase 444 Boardwalk if it was available and potential tenants that would consider leasing 444 Boardwalk if it was available for lease. Finally, we examined general economic trends and their impact on industrial vaues. 
 
Review of COMPS and Availabilities: Ideal is an analysis of three-five of each. Many more and confusion is created. Four comparable sales and five sale availabilities were considered. Analyzed were four comparable lease transactions and three lease availabilities. Specific details on each are contained in the succeeding sections. 
 
Comparable sales. We surveyed 75,000-125,000 square feet in six cities. In order to get a proper number - four - we included sales dating back to July 2022 - because only one sale has occurred this year in the range and cities surveyed. Of the four considered, square footages ranged from a low of 76,232 to a high of 123,650. Pricing ranged from $295-$316 per square foot. However, the $316 COMP occurred  before the increased interest rates took effect and slowed sale volume. Two of the buildings were purchased by occupants and two by investors. 
 
Sale availabilities. A similar narrative to the one for comparable sales is detailed here. 
 
Comparable leases. A similar narrative to the one for comparable sales is detailed here. 
 
Lease availabilities. A similar narrative to the one for comparable sales is detailed here. 
 
Potential tenants or purchasers: 444 Boardwalk would appeal to a variety of logistics providers or light manufacturing companies. Logistics providers require dock high loading, adequate sprinkler calculation for high pile storage, and proper turn radius for 53 foot trailers. 444 Boardwalk lacks the cube and sprinkler calculation for most modern logistics providers. A light manufacturing operation would require heavy power, office space sufficient to support different department operations, and a fenced and secured yard area for storage of raw materials and staging. 444 Boardwalk contains all of these amenities. Therefore, 444 Boardwalk would have great appeal for a buyer looking to occupy the building with his manufacturing business or a tenant needing a location. Many private investors are in the market and looking for good quality industrial investments. Most are driven by a return on their invested capital. Returns are in the 5.5 to 6.5% range for all cash purchasers. If a private investor must acquire the property using financing, the capitalization rate would have to be greater than his cost of financing - 7.5-8%. Sale activity throughout Southern California has waned since the halcyon days of 2021 and 2022 when institutional buyers were active. Declining sales have led to fewer exchange motivated investors in the market. 
 
Market conditions: Discussed here would be the total square footage of the market and corresponding vacancy plus the footage of the specific size range - in this case 75,000-125,000 square feet. If this distinction isn’t drawn - an improper look at vacancy emerges. Well also sprinkle in some economic head or tail winds - interest rates, global factors such as war or pandemics, elections, and recession fears. 
 
Special circumstances: These vary. In our example - here were the considerations. Ownership of the real estate and the operating company - have owned and operated from this location since 1997. We have seen a tremendous upward elevation of rental rates and sales prices since that period of time. Ownership of the real estate has subsidized the rent the operating company pays for several years. Consequently, the rental rate paid is substantially below that of the market. Such a subsidy causes an inflated estimate of the EBIDA and an understatement of the value of a capitalized market rent. 
 
Conclusion and Estimate of Value: We believe the buyer who will value 444 Boardwalk the highest is an owner occupant followed by a private investor. We don’t believe the building would garner any interest from a developer seeking to demolish the building and seek a higher and better use. 
 
               •             Occupant purchase - insert estimate
               •             Occupant lease - insert estimate
               •             Investor purchase - insert estimate
 
Finally, we include a disclaiming paragraph so that our opinion is not mis-used. You could word it this way. 
 
Disclaimer: This broker opinion of value is based upon sources from which we deem reliable. This is not an appraisal. Portions of this opinion could be used to form an appraisal. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.