Highest and Best Use: Market Analysis and

Transcript:Highest and Best Use: Market Analysis and:
Highest and Best Use: Market Analysis and Valuation Tom Hamilton, PhD, MAI, CRE, FRICS Gerald Fogelson Distinguished Chair in Real Estate Roosevelt University, Chicago School of Real Estate Chicago, Illinois for the 2016 Arkansas Day with Appraisers Little Rock, Arkansas May 12, 2016 Important Issues Inextricably Intertwined: An economic principle used and recognized for well over 100 years. Unitary valuation principle—can’t value the real property components and sum them up because some components’ values can be worth very little or even worthless without their economic linkage (connection) with the other property components. ABKA Ltd. v. Fontana-On-Geneva-Lake (231 Wis. 2d 328, 603 N.W.2d 217 (1999), 98-0851): “Income that is attributable to land, rather than personal to the owner, is inextricably intertwined with the land and is transferable to future owners.” 2 Important Issues Net Lease Drugstore Market: The Boulder Group of Chicago develops “The Net Lease Drug Store Report”. Has other market reports for “Dollar Stores”, “Banks”, “Auto Parts”, and “Big Box”. “Big Box” includes sub-sectors for “Large” (80,000+ sqft), “Mid” (40-60,000 sqft) and “Junior” (20-40,000 sqft) formats. 3 Important Issues Location Matters: In the Bucktown Neighborhood in Chicago, a Walgreens at nearly $11,900,000 (at a 5% cap rate with $595,000 annual NNN rent). Regarding this property, The Boulder Group states, “The Walgreens vastly out positions the nearby older midblock CVS that does not have a drive thru providing for a significant competitive advantage.” 4 Important Issues Fee Simple: The concept does not require a property to be vacant and available to lease. Fee Simple Subject To A Lease (FSSTAL): Real property owned by individual(s) or entity(ies) but occupied by others under lease. The lease is a contract and is subject to contract law. Contract Rent = Market Rent: The real property owned (FSSTAL) has a value equal to the fee simple value of the subject because the marginal value of the lease contract is $0. Using market rent indicators is necessary when valuing the fee simple interest. 5 Important Issues Leased Fee: An appraisal term (not a legal term) that values a property based on the present value of a property’s specific rental terms and conditions (net operating income) plus the present value of the reversionary value of the property upon the lease expiration. This is synonymous with value in use. Leasehold Interests can be Personal Property: Unless they exist for more than 30 additional years, leasehold interests are considered