Income Approach and Rate Logic (2015 Analysis of Market Information)

Transcription

1 Income Approach and Rate Logic (2015 Analysis of Market Information) General Commercial Groups of general commercial properties include: general retail, convenience store, strip mall, enclosed mall, big box retail, fast food restaurant, general restaurant, medical/dental office, office, bank, office warehouse, retail warehouse, mini warehouse, shelter, flex warehouse, general warehouse, airport hangar, dealerships, light industrial and service garage. Within the context of each property classification, there is a discussion of the factors that determine quality. Ultimately, the quality of a property is related to the typical rent that a property owner may be able to obtain in the open market (i.e. typically the higher the quality of a property the greater the rent that can be obtained in the open market). The Income quality is based on the location and physical characteristics of the building but more importantly should be reflective of the income stream potential of the property. The rent rates submitted by property owners are analyzed and properties were grouped and graded based on comparability in the property group, rental rates, location and physical characteristics. Properties that are owner occupied or have not submitted income and expense returns are assigned an income quality group based on the appraiser s judgement on comparability with properties that have returns submitted. As part of the analysis, monthly rents that appeared to be outliers when compared with typical rents in the category or attributed to a special relationship/arrangement between the property owner and tenant, were deemed not to be typical and therefore, not included in the rental analysis. Mass Appraisal Property Groups RETAIL General Retail (1353) Retailers primarily consist of local merchants that serve the local community. Regular retail can come in a wide variety of sizes and configurations. These properties may have upper floors with other uses such as: office, residential, restaurant, storage space, etc. Downtown properties tend to have limited parking confined to the street. Better quality regular retail typically have higher quality exterior with larger display windows and store-front finish, modern interior finish and ornamentation. Lower quality regular retail will tend to have lower quality exterior, interior finish, minimal partitions and ornamentation. Strip Mall (1412) A strip mall refers to construction design that tends to be linear, with tenants being located next to each other. Variations may include a horseshoe or L-shaped design. Strip malls consist of two or more units (tenants), each having open access directly onto an open car parking area. These malls can vary in size. Page 1 of 26

2 Better quality strip malls attract big box retailers or nationally recognized mini-anchors and can be located within a Power Centre. They also have good signage to the street. Anchors tend to carry single lines of merchandise such as: clothing, shoes, office supplies, etc. In addition, newer centres generally occupy large areas, allowing for phased build outs whereby the developer can add new tenants that complement the tenant mix. Lower quality strip malls have limited parking, lower quality interior and exterior finishes and minimal ornamentation and signage. They typically do not have nationally recognized anchor tenants. Enclosed Mall (1414) Enclosed Malls are completely enclosed, climatized pedestrian concourses in which the enclosing walls are part of the shopping center buildings. The concourses may consist of a single access point or it may include a number of subsidiary approach routes connecting to the main shopping corridor. These malls can be located on one floor or include many levels with stairs and/or elevators/escalators. Better quality enclosed malls are typically ones that have a higher quality anchor tenant/building while lower quality enclosed malls typically house lower quality tenants such as discount centers. Convenience Store (1419) Convenience stores offer a wide range of merchandise such as snacks, basic groceries, in some cases fast food and fuel. The better quality convenience stores usually have ample coolers, modern finishes and ornamentation. The lower quality convenience stores tend to have lower quality exterior, interior finish, minimal coolers and ornamentation. Big Box Retail (1700) Big box retail is a type of retail property, which tends to be a very large stand-alone establishment that generates strong consumer patronage. These types of buildings tend to lack in architectural design hence the term big box. They are typically large open shells with some partitioning for offices and storage areas. These buildings typically have a minimum of 15,000 square feet of retail space. OFFICE Bank (2304) Banks are generally thought of as specially designed buildings however they generally perform administrative functions. They are essentially an establishment that the public uses for financial services. These buildings typically also have a larger secured area for vaults and currency storage with some having secured gated or barred doors. Better quality banks typically have higher quality exterior (stone masonry and give an impression of solidity) and interior finish. Lower quality banks tend to have lower quality exterior, minimal interior finish and smaller vaults. Medical/Dental Office (2341) These buildings are designed for a higher volume of clients in addition to general commercial occupancy, and are normally divided into smaller units. A medical office building has a reception and waiting area, private examination rooms, office areas, and occasionally lab facilities. Better quality medical offices typically have higher quality exterior, interior finish and ornamentation. Lower quality medical offices tend to have lower quality exterior, interior finish and minimal ornamentation. The type and amount of mechanical fixtures commensurate with the quality of the building. Page 2 of 26

3 General Office (2344) Office buildings are designed for general administration purposes. Better quality offices typically have higher quality exterior, interior finish and ornamentation. They also may have lunch areas, reception and waiting areas, individual work spaces, board rooms and elevators. These properties often include accountant and law offices. Lower quality offices tend to have lower quality exterior, interior finish, minimal partitions and ornamentation. RESTAURANT Fast Food Restaurant (3349) Fast food restaurants are buildings constructed for the purpose of preparation and sale of food and beverages. These establishments typically consist of areas for consumption-serving, food and beverage preparation, storage, and drive through service windows, etc. Better quality fast food restaurants can include the chain operations as well as locally established fast food restaurants that target regional clientele. The quality of a building ranges from being very modern in terms of internal and external finish, often meeting strict franchise requirements. The building design is very functional/durable and is specific to the business operating out of the building. Lower quality fast food restaurants usually have minimal seating for clientele and food preparation area. General Restaurant (3350) Regular restaurants (otherwise known as Family Restaurants ) are buildings constructed for the purpose of preparation and sale of food and beverages. These establishments typically consist of dining areas, food and beverage preparation areas, waiting areas, storage, etc. Better regular restaurants usually include the chain operations as well as suburban neighbourhood restaurants that target regional clientele. Buildings in the better qualities may include hostess stations, lounges, separate food preparation areas, waiting areas, and are decorated with higher quality lighting, fixtures and ornamentation. The lower quality restaurants are usually associated with neighbourhood restaurants, or lower priced franchise operations. They tend to be built using minimal finish and ornamentation. INDUSTRIAL Office Warehouse (4344) Office Warehouse buildings are designed for general administration purposes and are located in an industrial area. A better quality Office Warehouse typically has higher quality exterior, interior finish and ornamentation. They also may have lunch areas, reception and waiting areas, individual work spaces, board rooms and elevators. These properties often include accountant and law offices. Lower quality Office Warehouses tend to have lower quality exterior, interior finish, minimal partitions and ornamentation. Mini Warehouse (4386) Mini Warehouses are warehouses subdivided into a mixture of cubicles of generally small size, designed primarily to be rented for small self-storage or non-commercial storage and may include some office-living space. Better quality units may be heated. Shelter (4391) Shelters provide weatherproof environments. They are designed for closed storage of materials or work areas. They include rigid shipping containers, typical wood framing or may be fabric Page 3 of 26

4 covered arch type enclosures. Better qualities may have heat, cement floors and electrical services. General Warehouse (4406) These buildings are designed for servicing, storing, transport, and/or manufacturing. They are usually one tenant buildings and 1-2 overhead doors. Tenants range from national distribution centers to small local storage facilities. Better quality properties typically have loading docks, better office space finishes and adequate parking. They may also have overhead doors, HVAC systems, floor drains. The better quality general warehouses also have higher quality exterior and interior finishes and ornamentation, building design, condition and maintenance. Lower quality general warehouses typically have lower quality exterior and interior finishes and ornamentation, building design, condition and maintenance. Office areas are typically only 3%-12% of building (varies with the quality of the building). These buildings are not usually built in central business districts, but are located where semitractor trailer units can access them and in neighbourhoods where large lots can be obtained. Airport Hangar Warehouse (4409) Airport Hangars are buildings designed for aircraft storage and repair maintenance. Better quality Airport Hangars may have offices and storage space depending on the type of service they perform. Lower quality Airport Hangars will have less height and access doors limiting the type of aircraft that can be stored or repaired. Flex Warehouse (4453) A Flex Warehouse is an industrial property that can be easily converted and normally includes a mix of both industrial and office space. It is a building providing its occupants the flexibility of utilizing the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse distribution, etc. Typically also provides the flexibility to relocate overhead doors. The building is generally constructed with little or no common areas, load-bearing floors, loading dock facilities and high ceilings. The better Flex buildings are transition buildings between the purely industrial type building and the office building and may look like either. The lowest qualities are light industrial mall structures for small space users. Dealerships (4455) Complete auto dealerships include showroom-office and parts-service facilities. Showrooms are vehicular salesrooms. Automotive service centers are designed for repair, parts, sales and service and will have showroom-sales area, office, storage and repair space commensurate with the quality. Light Industrial (4494) Light Industrial buildings are designed for manufacturing processes and can be either single story or stacked. An average amount of office space commensurate with the quality of the building is included (typically between 4%-12% of the total area). Better quality buildings (most often found in industrial parks) may have 15%-25% offices. Service Garage (4528) Service Garages are buildings designed primarily for vehicular repair and maintenance. Automotive Service Garages are designed for repair, parts, sales and service. Better quality service garages will typically have an office area, stores, and storage and/or shop areas. They may also include different floor levels for various services and higher garage door Page 4 of 26

5 height for service of larger speciality vehicle maintenance. Lower quality service garages will typically have lower garage door height limiting the vehicle type for service and may have a small office area. Retail Warehouse (4534) A Retail Warehouse is typical of large walk-through outlets with a semi-finished showroom and large carry-out warehouse as one complete facility in an Industrial area. Better quality regular retail typically have higher quality exterior with larger display windows and store-front finish, modern interior finish and ornamentation. Lower quality regular retail will tend to have lower quality exterior, interior finish, minimal partitions and ornamentation. Rental Income Quality The City of Medicine Hat Assessment Department based the quality of a property on the combination of two factors: location and the physical characteristics of a property. Location Tenant Exposure Properties with high exposure to the public tend to demand higher rental value than similar properties with poor exposure. Access Properties that allow for easy entry and exit of clients are usually viewed as being of higher quality than properties that do not. A site with adequate parking may be higher in quality compared to a property with insufficient parking. The effect that each of these elements has on quality was considered with the type of property being analyzed. Open malls, big box retail or restaurants of higher quality must have sufficient parking. Inadequate parking spaces can be the source of poor rental rates and high vacancies. In contrast, street front retailers may not require large amounts of parking if there is good pedestrian traffic. Amenities and Attractions the surrounding properties may affect the quality on a property. Commercial properties within a residential area tend to have a lower quality due to being in a less desirable area. Physical Characteristics There are a number of physical elements that may affect the determination of quality. These characteristics are considered within each Classification Group for example, what is typical for Warehouse properties may not be typical for Office properties. Age The age of a property may contribute to the quality of a property. A property with an older building may not be as desirable where a newer building may be more desirable for a number of reasons. Exterior Material Treatment and Finish - The exterior of buildings that have superior and/or modern materials and ornamentation will be regarded as higher in quality. Interior Finish - Buildings with internal finishes will vary in quality depending on materials and ornamentation. Page 5 of 26

6 Building Design - The functionality of the building will influence quality. Buildings designed to contribute to the efficient delivery of services are seen as higher in quality. Visual Appeal Properties with good visual appeal that catch the attention of consumers would be of a higher quality. Condition/Maintenance - Buildings that are well maintained are of a higher quality than those that have visible wear and tear. The quality tables for each property type consider the combination of location and physical characteristics. When determining quality, some criteria may be given more weight than others. Quality Type 9-Above Excellent 8-Excellent 7-Above Good 6-Good 5-Above Average 4-Average 3-Above Fair 2-Fair 1-Poor Description Best locations, higher vehicle traffic, Best designs and materials, best function demand or utility than the group in general. It is among the most desirable in the market and location that has optimal access. The property typically will have high quality finish and architectural design. The structure optimizes function and visual appeal. It appears to be in excellent condition due to recent construction and/or diligent maintenance. Best locations, higher vehicle traffic, Best designs and materials, best function demand or utility than the group in general. It is among the more desirable in the market and location that has good access. The property typically will have good quality finish and architectural design. The structure has good function and visual appeal. It appears to be in very good condition due to recent construction and/or no obvious evidence of deferred maintenance. Best locations, higher vehicle traffic, Best designs and materials, best function demand or utility than the group in general. It is among the most common buildings in the market. It is still desirable in the market and location that would have average access. The property typically will have basic finish and architectural design. It appears to be well maintained with little to no obvious evidence of deferred maintenance and is not functionally obsolete. Best locations, higher vehicle traffic, Best designs and materials, best function demand or utility than the group in general. Building met building codes at the time of construction. It is among the less desirable in the market and location may be below average access. The property typically will have below average quality finish and lack architectural design. It may require renovations and repairs due to deferred maintenance and repair. It is among the least desirable and may take a long time to attract a lease in the market. The property typically will have low quality finish and little to no architectural design. It appears to be in poor condition due to a lack of maintenance, low cost construction and in need of extensive renovation. Page 6 of 26

7 The Valuation Model Rent Analysis The valid lease and rental information contained in the 2015 Non-Residential Request for Information (RFI) forms (such as non-owner occupied, arm s length leases) were used to calculate Net Rents for each lease. Additionally, to mitigate shifting of rental rates, an additional step was added to the rent analysis for some categories. Rates were averaged using two years of data for some categories to reduce volatility. Individual tenant areas are supplied to The City of Medicine Hat by property owners/managers through submitted income and expense returns. The rent rates are analyzed as triple net annual per square foot rental rates. The analysis used total building size to determine square foot rental rates therefore the valuations included total building size to determine the 2016 Property Assessments (consistent theory applied in analysis and Assessment valuation). Once the Net rent for each lease was calculated, the rates were analyzed by Group and Quality. Typical rents for a particular property group were then established from the Median Rate within each quality and tenant area size. Base Median rates were used and the rates then increased or decreased depending on size (economies of scale): Economies of Scale is one of the most salient features of real estate as it is the tendency for the price per square foot of land or building space to decrease as the net square footage in a transaction increases. Conversely, the price per square foot tends to rise as the property size decreases. General Commercial Rent Analysis Detail Rental Data In 2015, 623 Request for Information forms were sent to rental property owners. There were 340 returns submitted by property owners. Of these 340 returns: - 84 were incomplete and 22 were owner occupied There were a total of 512 rates used in the analysis from the usable returns. Time Adjustment Time Adjustment was checked but was not required in the Rental Rate Analysis. Vacancy Rates Vacancy analysis showed that the overall vacancy is in the 4% range that was used in The 2016 analysis indicated however that there are five different areas, downtown (6%) and an area adjacent to downtown (4%). Both areas have improved by 1%. The remainder of the City has an applied vacancy rate of 4% to 7%. For the Mini Storage Warehouse Classifications, the Vacancy Rates were increased to 25%. An additional 16% allowance was applied for Vacancy Obsolescence to those properties with vacancy of more than three years, and is listed on the market for lease. Page 7 of 26

8 Expense Rates The City of Medicine Hat has applied an amount of 2% for structural maintenance and repairs and 4% for management fees. These are standard allowances used in most appraisals and accepted as industry standards. Page 8 of 26

9 Results of Rent Analysis Rent Application Tables Median Rates Page 9 of 26

10 Rent Application Tables Median Rates (continued) Page 10 of 26

11 Rent Application Tables Median Rates (continued) Page 11 of 26

12 Rent Application Tables Median Rates (continued) In some qualities, there were no properties that supplied usable rental information. In some cases a rate per square foot was determined from a ratio (used from similar property types). Capitalization Rates Capitalization is the process of converting the future anticipated benefits of a property's ownership (i.e. the rental income stream) into an estimate of present worth or value. A capitalization rate or "cap rate" expresses the relationship between the income stream of a property and its sale price. The capitalization rate for all properties was established using the following formula: capitalization rate = net operating income sales price The capitalization rates were calculated using qualified sales that occurred from July 1 st, 2012 to June 30 th, They were determined through analysis of 49 improved sales of rented and owner-occupied properties. Typical rent was multiplied by model areas, with the sum of all these amounts equalling the potential gross income. The neighbourhood vacancy rate was then Page 12 of 26

13 subtracted to arrive at an effective gross income. Structural and Management expenses were subtracted from the effective gross income to obtain the net operating income. The typical net income was divided by the typical time adjusted sale price after deducting for surplus land and /or cost items to determine the indicated overall Capitalization Rate. Some sales from previous years were removed from the analysis if they were substantially changed after the purchase. Page 13 of 26

14 2015 NON-RESIDENTIAL SALES ANALYSIS Page 14 of 26

15 TIME ADJUSTMENT FACTORS NON-RESIDENTIAL INDUSTRIAL Page 15 of 26

16 TIME ADJUSTMENT TABLES NON-RESIDENTIAL Page 16 of 26

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18 CAPITALIZATION RATE STUDY COMMERCIAL Page 18 of 26

19 CAPITALIZATION RATE STUDY INDUSTRIAL Page 19 of 26

20 ECONOMIES OF SCALE ANALYSIS INDUSTRIAL GROUPING Page 20 of 26

21 SURPLUS LAND Rental rates were established using typical site coverage. Analysis was based on a site coverage of 21%. Land areas that exceeded 21% were considered as a surplus value to the calculated income valuation. The surplus land value was calculated at 70% of the neighbourhood rate times the surplus land area. This value was added to the income valuation. Page 21 of 26

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24 Non-Res VACANT Land Sales Analysis (for tax year 2016) Page 24 of 26

25 Non-Res VACANT Land Sales Analysis (for tax year 2016) continued Page 25 of 26

26 Non-Res VACANT Land Sales Analysis (for tax year 2016) continued Page 26 of 26