When a person is either a buyer or a seller of a shopping center, the question of value for a sale is paramount. How do you appraise such a property?
In commercial properties, there are three types of methods commonly used to establish a value for appraisal. They are:
The Market Data, The Cost of Replacement and The Income method.
- The Market Data. This method of appraisal is seldom used in a shopping center. It relies on a comparison of sales of similar properties. Since this type of property may be unique in an area, there usually are just not enough properties to compare with it to establish a true value.
- The Cost of Replacement. This method of appraisal is computed on a per-square-foot basis of construction costs to replace the buildings with the current value of land added to the formula. This type of appraisal might be a little closer to the current value than a market data method.
- The Income. This would usually be the most appropriate method for a shopping center. The appraiser would use the net income from the current rents, capitalized at a determined rate to establish the value. The value would then be based on what the property is actually doing financially, and would be more accurate than the other two approaches.
A good appraisal would usually have all three of these approaches to value contained in the report. While the other two should have some bearing on the value, the Income method would be given the most attention.
The existing leases could have an effect on future income, even if a good estimate of current value has been obtained. Some things to look for in the existing leases in a shopping center would be as follows:
- Do the leases contain rent escalation clauses? On what are they based?
- Are tenants required to keep their stores open, or merely pay the rent? A major chain store might find that closing the store that is losing money could be less of a loss than just paying basic rent for the balance of the lease.
- Are all of the expenses or common-area maintenance shared among the tenants of the center?
- Do the leases have the provision that tenants must be members and contributors to the center’s merchant’s association?
- Do any of the leases place any burdensome restrictions on the owner? Are there exclusives?
- Do any leases contain options for renewals? If so, what are the terms?
- Do any of the leases allow the tenant the right to cancel?
Since leases with major tenants were originally negotiated skillfully with legal experts on both sides, they should now be evaluated carefully by an expert real estate broker and attorney.
This is the very basic data to start an owner or buyer into a transaction of a shopping center. On a specific property, you should be guided beyond this by your real estate professional.