Property values on a building per square foot (PSF) basis vary widely in Downtown Los Angeles. Within a couple blocks, the commercial real estate landscape can change drastically. We recently appraised an industrial building located in the Wholesale District of Downtown Los Angeles. The subject building was constructed in 1960. The improvements total 44,500 square feet (SF) and are situated on a 2.25-acre (98,150 SF) site.
We were informed that there was a prior appraisal performed by another commercial appraisal firm several weeks prior, where the subject was appraised at $95 PSF of building area, which corresponds to a value of $4,227,500.
As we do plenty of work in Los Angeles, we are aware that land is scarce and many brokers in Los Angeles, price industrial buildings on a site/land basis as well. This is an extremely important unit of measurement for commercial buildings in Downtown Los Angeles. We acknowledged that there was quite a big range on a building PSF basis ($90 to $120 PSF) of recent comparable sales of industrial properties located nearby the subject. However, on a site basis, there was a much narrower range ($48 to $52 PSF of site area). We concluded $50 PSF on a site basis and $110 PSF on a building basis, which equates to $4,910,000 (rounded). Our conclusion was further supported by interviews with local brokers.
The difference from our appraised value and the other appraisal firm was $680,000 (rounded). This is a large variance and was the difference in securing a loan and closing a sale. The other commercial appraiser clearly was not experienced and did not fully understand the Downtown Los Angeles Market.
We recently appraised an apartment complex in San Diego. It was reported that the subject property consists of 22 apartments units. It was a pending sale for $2,300,000. It appeared that this was a typical apartment transaction. However, this was not the case. For every commercial appraisal assignment, we research the subject property through various sources such as County/City records. We called the planning and building department to verify the subject property information. It turns out that only 18 units were permitted and the remaining four units are considered illegal. From the inspection, it was impossible to tell that there were illegal units as they were professionally done.
The current owner failed to report this information to the listing broker, bank and pending buyer. As such, the pending buyer was able to lower the purchase price substantially (several hundred thousand dollars) with this new information. This could have easily been not caught. The buyer and bank was able to avert substantial risk in this transaction.
We recently appraised an office building in Santa Ana. It was a pending sale to an owner-user for $1,800,000. The buyer was going to use SBA financing. The buyer also wanted to get additional money ($300,000) for upgrading and building out some of the interior of the building. For every commercial appraisal assignment, we thoroughly review all construction costs. It turns out that the upgrading/tenant improvement costs mainly consisted of business equipment.
This could easily been not caught by another commercial appraisal firm. We only credited the upgrading/tenant improvement costs that would add any value to the real estate and not the business equipment. The bank was able to avert risk in this instance.
We recently appraised a cold storage industrial building in the Produce District of Downtown Los Angeles. Cold storage industrial buildings are rather unique and it is imperative that an experienced appraiser value such properties. Another commercial appraisal firm appraised the same building several weeks prior. The owner was trying to get the property refinanced with the bank. The appraisal from the other commercial appraisal firm came in much lower than he thought and the owner was not able to refinance. So the owner tried with another bank and thus we were contracted to do the appraisal. The owner told us of the comparables that were utilized in the prior report and even provided the prior appraisal. Upon further review, the appraiser did not use any cold storage comparables and essentially said that the cold storage component did not add any value.
As we do many cold storage facilities, we are fully aware that cold storage properties rent and sale for a premium in the Los Angeles Market. We appraised the subject at market value. We used cold storage rent and sale comparables. The premium for cold storage was clear. In this case, the premium amounted to 35% to 45% over a typical industrial building. The owner was able to refinance his property.
We recently appraised a brand new, build-to-suit, single-tenant NNN CVS drugstore in Sacramento. The lease is for 25 years and the tenant has four, five-year renewal options. CVS Pharmacy has a high credit rating. It was a pending sale of the property for $4.2 million, which equated to 6.0% cap rate.
A local commercial appraisal firm was contracted to appraise the property. The appraised value came in at $3.7 million. This was much lower and the bankers, brokers, buyers, and sellers were perplexed and wanted to have the property appraised by another commercial appraisal firm. We were hired to conduct an appraisal of this property. We are the foremost experts in single-tenant net leased (NNN) properties across the nation. We reviewed the prior appraisal. It was clear that the appraiser did not have experience with net-leased NNN properties. The appraiser concluded a vacancy and collection loss of 15% along with a market expenses.
We examined over 500 sales of single-tenant NNN properties across the nation confirmed with several different brokers that specialize in sales of net leased developments. None of the sales had a vacancy factor or any expenses built in by the buyer or seller when calculating the net operating income and corresponding capitalization rate. Any risk associated with the tenant vacating is reflected in the capitalization rate.
There was plenty of support for the pending sale.
We recently appraised a multi-tenant retail center located in Riverside. The center was 100% leased to eight tenants. The building was built in the 1950’s and city/county had no building records regarding square footage and etc. The owner provided us with a rent roll. For every commercial appraisal assignment, we measure the subject building improvements. The rent roll provided by the owner was over 2,500 SF larger than our own measurements. We could easily see see a scenario where another appraiser would of just used the rent roll provided for the square footage. If that were to be the case, the property could have been overvalued. It is extremely important that the appraiser measures the improvements.