Caveats to Industry Standard Operating Expense Studies – Part 3 of 3
“But You Promised…”
I promised a real-world example. So be it. About a dozen years ago or so, I called and spoke to one of the designers of the Urban Land Institute’s Dollars and Cents study. I don’t have access to the reports I did at that time (it was under someone else’s employ), but in 2002, I had a difficult shopping center to appraise. So I called and spoke to a project manager for their industry standard study. The names have been omitted to protect the innocent. Here is the actual text from my appraisal report (minus the name of the interviewee)
The numbers in the columns of Dollars and Cents intentionally do not add up. For instance, Total Rent is comprised of Minimum Rental Income and Overage Rental Income, yet adding these two sub items together does not equal what is shown as Total Rent. This can be said of virtually all the items in their Operating Results tables.
According to Urban Land Institute (ULI) , they do not add up because “each line item is calculated based on the total of its own category.” This has significant impact on the results. To best understand the difference, we’ve presented a numerical example below.
Table 4-2 of their 2002 edition (page 87) has a “Property taxes and insurance” amount of $1.71 per square foot. Yet underneath it is a “Property taxes” amount of $1.91 per square foot and an “Insurance” amount of $0.10. Clearly, adding the two sub items does not even come close to the “Property taxes and insurance” item above; in fact, the sum is $0.30 per square foot greater than the total! The reason for this is that, say, 25 centers replied to ULI’s survey with a line item for “Property taxes and insurance”, yet only 15 of them had a separate line item for property taxes and another for insurance. Taking the average from 15 survey responses and adding them up would not likely equal the 25 responses for the the two components that were not delineated separately. This explains why very few of the Dollars and Cents totals add up to the sum of their individual components (i.e. they are not based/calculated on the same number and is based on different sample sizes).
Having said the above, which numbers do we choose? According to ULI, that depends on the line item we are using as a basis of comparison. To use the example above, if we wanted to compare the subject’s Property and insurance line item [note the singular], we would need to choose the same category from Dollars and Cents, not add up the individual components and use that for comparison. That leads us the natural question, which of the two is accurate? ULI answered that question with “it depends”.
Although technically correct, this answer leaves us with having to choose which of their numbers truly reflects the results of a particular category and since each item and its total are based on different sample sizes, there is simply no way to know.
Dollars and Cents of Shopping Centers is the accepted authority for deriving industry based numbers, so disregarding it would not be proper. Given the faults discussed, it is our opinion that using the largest income and expense categories would produce the best comparison. The largest categories would have the greatest number of survey samples (being the most reliable), differences in the reporting of their smaller line items would average out, and a typical market participant would give particular credence to these categories over the smaller line items that may or not be reported in a center’s operating statements. The largest categories would be Total Operating Receipts, Total Operating Expenses and Net Operating Balance; only these three categories will be compared to the subject.
So there you have it. Try calling them or other designers of the industry standard studies and ask them about any confusion they have. You paid for the study… you’ve got the right to know.
John Simpson, MAI
Caveats to Industry Standard Operating Expense Studies – Part 2 of 3
Sample Size
Another factor not considered in the blanket acceptance of industry standard operating expense studies is the size of the sample. As discussed in Part 1 of this post, Dollars & Cents appears to have a threshold where a certain number of responses for an expense category are necessary for it to be reported. Fortunately, most studies of this type report the number of properties that have been used to provide that information, so we have an ability to judge whether the data is sufficient to be statistically significant. Strangely, few people seem to notice this stat.
Same goes for IREM’s Income/Expense analysis. Selecting another random page, each grouped set of columns has a “Buildings” column that appears to report the number of buildings where respondents provided that line item on their financial statements. This example has 92 buildings as part of the the sample… a really good number! The individual income and expense line items range from 1 to 90, but about 90 percent of them show 70 observations or more, so we can see that the sample is good enough to be credible and statistically significant. I can’t say there’s much gray between the black and white of the printed word and page for this study… which is a good thing. Same goes for BOMA’s Experience Exchange reports.
Let’s take an example. The IMI Financial Operational Benchmark Study for Marina Operators is an indispensable source for marina operating data, but the number of marinas used as part of the sample are much lower than that reported by similar studies by ULI, BOMA and IREM. Their 2000 study had 13 respondents from Region III (13 Midwest states) and 13 from Region IV (13 West Coast states). With California in Region IV, do you think that 13 marinas are statistically significant enough to be reliable? Would you accept the Region III results with only 13 marinas reported from 13 states or an average of 1 per state? I’d say the odds are against them even being a reliable and reflective sample of the population, as they say in statistics speak. I’m not trying to bash the study… I’m simply pointing out that you need to know how well it represents what it is supposed to represent to rely on it. When there aren’t many “observations” in a sample, don’t treat it like the gospel.
Do the Math
Getting back to our example from Part 1, it looks like our Sherlock Holmes sleuthing is paying off. Let’s say we select the Average column as best reflective of the property we’re comparing it to. Have you tried to see how well the numbers add up? Going back to my random page selection from Dollars & Cents, Total Advertising and Promotion is $0.98 per square foot of GLA (gross leasable area) on average. Underneath that and indented are components of Advertising and Promotion. Advertising is $0.39, Promotion & Special Events are $0.21, Christmas Decor/Events are $0.09 and Marketing Administration is $0.17. Doing the math, that’s $0.86, not $0.98 per square foot.
That leads me to two thoughts. First, almost all of the “Total” columns suffer from the same problem. Second, Merchants Association was blank, which was part of Total Advertising and Promotion. You’ll find lots of these situations… but don’t conclude the difference is Merchants Association! You’ll see why in Part 3 when I go over a real example and the response of one of the industry study designers to my questions.
“Totally…”
I can’t help but read this title using Crush’s voice from Finding Nemo. I’m sure he’d read the paragraph above and say “Like… Dude… when do I use Total?” Well, Crush, Total isn’t really a total. I’m sure you just as confused as poor Crush. You see, the Total columns is based on the the number that is reported from the sample respondents. It is not the sum of the line items that comprise it, which is somewhat misleading given that they are presented in the Dollars & Cents study as indented below the total they would logically represent. What this means is that if you want to use total advertising and promotion to compare to your subject’s total advertising and promotion line item, that’s the way to compare it. You don’t add the sub-items up because you’d find in most cases that they add up to a different total.
So let’s take this a step further. You’ve got a financial statement in front of you with advertising, promotion, Christmas Decor/Events and Marketing Administration, or their equivalents. Should you compare these to the individual line items or add them up and compare them to the Total advertising and promotion expense? Your guess is as good as mine. It’s not explained well at all in the industry standard studies.
The Operating Expense Ratio
Given the issues discussed above and those presented in Part 1, you might want to fall back on the operating expense ratio (net operating income divided by effective gross income) as the most reliable line item. Now that’re you’ve studied and are ready for the final example, do you think the operating expense ratio is stand-alone, is based on the sum of the total columns or the sum of the individual subitems for each total column? If you find out the answer, let me know. It has to be calculated somewhere because it is the ratio of two numbers, but whether it is calculated from each sample financial statement submitted or is calculated from column items is anyone’s guess.
Stuffing Santa’s Stocking
So maybe I’ve made you a big fan of using the average in an industry standard operating expense study. Before you start getting cocky, ask what the average is an average of. Studies like BOMA’s Experience Exchange Report are great because they give you tabular statistical data on what comprises the average. You can see the average square footage per office user in a particular category, the occupancy rate and lots of other details. That’s very useful for pinpointing how well the property you wish to compare to the study reflects the properties that are reported. If your number is significantly different, maybe consider one of the other categories like high, low, Upper Decile, Lower Decile, or whatever is used in the study. ‘Food for thought.
Conclusions
To base important financial decisions on industry standard operating expense studies is a little like being spun around and having to play darts blindfolded. If you understand the caveats of each study, you’ll at least be pointed in the direction of the dartboard. You may find that to score a bulls eye, you’ll have to contact the designer of the study and have them answer your questions and give you advise on how best to interpret their numbers. That’s what I did and you’ll see the result in Part 3.
John Simpson, MAI
Caveats to Industry Standard Operating Expense Studies – Part 1 of 3
I wonder how many people have looked at industry standard operating expense studies and simply accepted them as the truth, the whole truth and nothing but the truth. Dare I say 99 percent? That would be me in the 1 percent exception with a small number of other knowledgeable persons who understand the limitations of these studies. Not that we don’t use them, mind you, but we know the things that they’re not telling you. By the time you’re done reading this blog post, you’ll be eligible to join our little club. There’s no entrance fee, so there’s no need to fish dive your pockets for spare change.
What is “Industry Standard”?
By industry standard, I’m referring to the studies that are accepted at face value and are used so often by real estate practitioners, investors and owners that they become household words in an industry. Examples include Dollars & Cents of Shopping Centers by the Urban Land Institute, Income/Expense Analysis for Conventional Apartments by the Institute of Real Estate Management, the Experience Exchange Report by the Building Owners and Managers association and even lesser-known studies like the International Marina Institute’s Financial Operational Benchmark Study for Marina Operators. These publications and others are excellent and I use them frequently, but like any tool, if used incorrectly the results may not be what you expect.
Why Am I Letting the Cat Out of the Bag?
As an appraiser who has had attorneys try to discredit me by hammering home the flaws in operating expense studies as they were I quoted in my reports, I’m merely putting in the public venue what I’ve already put on public record. I originally stumbled on this about 15 years ago and then again in 2002, so you could say that I’ve wanted to speak my mind for a long time. My intention is to educate, not to prosecute.
The Gray Between the Black and the White
Most of the major property type industry studies show you multiple columns of income and expense numbers. Let’s take Dollars & Cents. We have a column for Average, Median, Lower Decile and Upper Decile. Taking this study further, you’ll find two sets of Median, Lower Decile and Upper Decile – one for dollars per square foot of GLA (gross leasable area) and one for percentage of total receipts. That’s 7 columns! Can you guess the first big problem? Yep, it’s selecting the most appropriate column. I’m sorry to say that you won’t get good guidance in these studies of when to select a particular column – you’re presumed to be the expert, I guess.
I know what you’re thinking – which one should I tell you to choose? I’m going to discuss a real-world example below that answers this question… yet doesn’t answer it. Don’t shoot me – I’m just the messenger!
I’d bet that most people would say select the average column without giving it any more thought. Maybe that is the answer. Maybe not. If you say it is, make sure you understand how the average fits in with the data. For instance, I’ve randomly selected a page from one Dollars & Cents study that has an average utilities expense of $0.87 per square foot; however, the median (most frequently occurring value of a sample) is $0.65 per square foot. The Lower Decile is $0.15 and the Upper Decile is $2.84. Given this, would you think that the average might be skewed higher due to the number of sample items between the average and the Upper Decile? Hmmm… the numbers you see are black on white, yet I’ve introduced some gray into the equation. This is just one of many types of comparisons that can be made among the dozens of operating expense line items shown in these studies.
Speaking of averages, IREM’s operating expense studies don’t have averages, also known in statistics as the mean. They have median, high and low. For those of us that like averages… oh, well.
Plugging Some Holes
So looking at these industry standard studies, you’ll typically find some white space in columns where there should be numbers. You won’t find that for averages or medians, but you will find it in whatever other columns are reported. As you might guess, that means there was no data for the line item in that category. For instance, from my random page selection, landscaping expense has an average and a median, but no Lower Decile or Upper Decile. To me, that says that you can’t really use Lower Decile or Upper Decile because you have incomplete data. You’re forced into using average or median. Well then, it seems that there isn’t much use for Lower Decile or Upper Decile. It wouldn’t make sense to fill in numbers with averages, at least not by my way of thinking. You’d be better just using the average column completely. What these missing “cells” have in common, most likely, is an insufficient sample size. On my random selected page, every single cell that is blank has a sample size less than 10 observations. So there is the cutoff – the designers of the study feel that 10 is the magic number to report Lower Decile and Upper Decile.
Majoring in Mathletics
For you math athletes out there, you’re probably wondering why we don’t see some statistics. You want standard deviation. You want variance. All your old number friends from Statistics 101 want some playtime. I’m sorry to say we don’t see much of that. Clearly, the standard deviation would tell us how reliable a particular line item really is. With the number of observations reported for each line item in Dollars & Cents, you’d most likely see a correlation in the line items with the most observations having the smallest standard deviations, but without reporting this number, there is no way to know which line items meet the user’s test of reliability from those that do not.
Part 2 of this series will discuss sample size, numbers that don’t add up and the importance of using totals. Part 3 will take all these items into consideration with a real world example.
John Simpson, MAI
Realities of the Boat Sales Business in the Recession
There are many trends that are severely hampering the boat sales business. I’d venture to say it’s never been this difficult. Unfortunately, this is going to be a problem for a long time to come, probably somewhere along the line of two years. Here’s what’s happening:
- The number of boat repossessions per month is astronomical. I hear it’s as many as 2,000 per month along the East Coast. That’s enough to fill a whole bunch of marinas month after month. Naturally, this has caused an extreme degree of conservatism on the part of boat lenders.
- The single biggest problem out there is the inventory of repossessed boats. What do you think happens to them? Well, it works like this. The banks take back all these boats. They put them on consignment, but they don’t sell. So a boater goes into the dealership to buy a boat and he won’t qualify. Ah… but that’s where the problem begins! He won’t qualify for the boat he wants, but lookee here… the bank is willing to sell some boats out of their inventory for 50 cents on the dollar! Best of all, they’ll provide the financing for it. Why not… it moves it off their books. So the result is that until the boat repossessions stop flowing and the banks work out their inventory, the boat brokerage business is effectively dead. Sure, some low level of sales will occur, but it’s not like it’s pure profit.
- The sales talent has virtually left the industry. What few salespeople remain are on commission only. If you were a top salesperson, you long ago left the business and I doubt you’re coming back.
- As for credit scores, it’s not about credit. Deals are getting turned down with some incredibly high credit scores, as in 730 and above. You could be a Doctor or a Lawyer. How is this happening? It’s called the debt to income ratio. It doesn’t matter that you have a paid Mercedes in your garage and you’ve paid every bill on time in your entire live… if your debt is too high relative to your tax returns, forget about it. This won’t change until the inventory of repossessed boats is eliminated from the banks.
- The services you see advertised are the same, but they most definitely are not. Mechanics and other personnel have been let go in droves. Everywhere you go, the businesses are operating on skeleton crews. That’s a lot of top talent that isn’t coming back to the business.
- What happens when a dealership cuts payroll to the skeleton crew level, puts nothing back into the marina and still has to cut costs? There’s only one thing to do. Contract it out. Contract out most of your repairs, eliminate the parts department and buy only when needed… and hope that quality doesn’t suffer. That’s fine if you’re a dealership without a major league reputation, but those that spent decades building it up and have won awards really have a tough choice.
- Of course, other dynamics have to turnaround. The unemployment rate has to decline substantially. People have to start feeling good about spending, although I’d say there’s a whole lot of stigma toward big purchases that will last well beyond when Mr. Obama says “the recession is over”. Also, banks have to stop being so deadly serious about about the debt to income ratio and even ease up on the credit score. Easier said than done.
So there you have it. As this recession has taught everyone, it’s not about you, your business or your credit. It’s all about the banks, isn’t it?
John Simpson, MAI
Secrets of Appraising Vacant Land – Part 4 of 4
So up to know I’ve explained the what, but not the how. Let’s fix that.
How I Would Handle the Value Range Problem
Using our $15,000 to $70,000 per acre sale range example, what I would do is create a ranking table for the subject and the sales. I’d rank each feature on a 1 to 5 scale. The total would give me some idea of how each sale compares to the subject and every other sale. But that’s just a start.
One key thing is missing from the above. All of the characteristics have the same weight using a simple scaling grid, but that’s not the way market participants think. One purchaser might view soil with a greater weight than another and so on. In your verification, try to get that type of information. What characteristics did they consider to be more important than others? When you’ve verified all your sales and gotten this type of information, you might see some market tendencies.
Another question you can ask is whether the purchaser found out something after the fact that would have changed their purchase price. “If you were to buy the property back then knowing what you now know about it, would you have paid the same price?” That’s a key question to ask. If the answer is “yes”, you’ve found support for an adjustment. You’ve found support for a ranking weight adjustment. You’ve also explained why there may be some outlier sale price per acre and how to handle it.
A Check and Balance
There is a little technique that you can use to provide a check and balance on your final value conclusion. I call it the the land to gross sellout ratio. It’s really just a builder’s rule of thumb.
If you find out the sale prices of the homes a developer intends to build on a site (or better yet, the prices for what they actually built), add them up. You can also take an average. That’s the denominator. The numerator is the sale price. Then just do the math on your comparables and look at the range.
Let’s do an example. You see that a developer bought a property for $100,000 and expected to build five homes that will sell for $200,000 each. That’s $1 million in revenue. Taking $100,000 and dividing it by $1 million is 10 percent. You’re saying that raw land is worth 10 percent of what the income will be. Let’s say we have four other sales with ranges between 7 and 15 percent. Now that’s a range you can work with! If you conclude a market value that would have a land to gross sellout ratio of 11 percent, you could simply put together a quick table that shows the ratios for your sales and where your subject fits into the matrix. Maybe 11 percent falls in the second position of the five sales if you ranked their ratios from low to high, for example. You’re in the range and you’ve supported your conclusion.
I use this technique whenever I appraise residential subdivisions. I explore it in depth in my upcoming Subdivision Analysis online seminar I’m developing for appraisal education provider McKissock (a shameless plug, I’ll admit:) Still… the point is that you can reconcile a huge range in sale prices by proper due diligence, considering intangible sale factors and using these two techniques. Appraising vacant land doesn’t have to be that risky, even though land development is.
John Simpson, MAI
Secrets of Appraising Vacant Land – Part 3 of 4
Let’s take a look at the land from its futuristic orientation. By that I mean that the property will have to receive approvals, site improvements, building improvements and find users (tenants and/or owners) that span a substantial amount of time into the future, usually years.
Risky Business
Even children know that anything that takes years to come to fruition is a lot riskier than something that exists today. A bird in the hand is worth two in the bush, as they say. The word “future” is synonymous with risk. The longer you have to wait, the more variables can get in the way to change your chosen path.
Many aspects about development risk you already know quite well. Every one of us knows that the economy can change, sometimes for the worse and sometimes for the better. Let’s add a change in supply to the list, not as in land supply but as in home or end-user building. While you’re in the process of obtaining approvals for development, some major national builder may decide to start building in the same town. Maybe they’ll start building next door or across the street. National residential home builders prefer to buy lots from subdividers (developers who buy raw land, obtain the approvals, install site improvements and then sell the whole project to home builders), so if there’s something already in the pipeline, it doesn’t mean the developer who is trying to obtain those approvals will developer their own homes. So, surprise… XYZ national builders is going to open up and turn your lovely project from profit to loss.
Another risk factor is the unknown of the approval process. Maybe you’re the lucky one who is trying to obtain approvals for a subdivision that houses a roosting area of endangered birds. Maybe you didn’t know the land had an environmental problem; you did pay for a Phase 1 environmental site assessment before you bought it, right? Perhaps you didn’t know the water table was so high. What if your conceptual use doesn’t fit into the new Master Plan that just came out and was voted into law? Maybe you need financing and the lenders just aren’t lending (we’re now all experts in that). Could a natural disaster happen that changes the way governments view new development? This is only the “short” list… I didn’t want to strain my fingers.
How Developers View Risk
For developers, it’s really quite simple. The higher the risk, the higher the profit they need to make the time, effort and cost worthwhile. That’s why entrepreneurial profit is included as a line item in any cash flow projection. Still, there’s a relationship between the discount rate used in the subdivision development method (which is a risk rate) and entrepreneurial profit (the return for taking that risk), so there’s a trade-off. Raising the discount rate and lowering the entrepreneurial profit has the same basic effect as lowering the discount rate and raising entrepreneurial profit. Of course, the amounts are important, too, but I just wanted to put that fact out there for thought.
Back to Appraisal Theory
So getting back to the appraisal arena, future risk means the following:
- A higher discount rate if you perform the subdivision development method
- A strong tendency to use historical sales data to avoid the nebulous nature of the future
- Dismissing listings that are available today but may not be in a year or two
- Higher allocation for entrepreneurial profit
This all sounds good, but when you are faced with, say, five land sales that range between $15,000 and $70,000 per acre and you can’t see a physical difference between them, how does the above help? Well, owners view risk differently. They have different levels of expectations for how their dreams will turn out for the property; as a result, entrepreneurial profit expectations vary. They view locations differently too. In other words, there are many subjective elements that explain differences in land values between comparable sales that y0u never see in improved property transactions. Even though we appraisers have to assume “competent” and “knowledgeable” buyers as part of the definition of market value, this is frequently not the case when it comes to land purchasers. This is where verifying the sale comes into play.
This argument is the single most important aspect that is typically left out of an appraiser’s report. Why were these particular sales presented? What sales were excluded? Why? How would the market and market participants view this property? How did they view the sales?
By not answering these questions, the appraiser can wind up selecting a market value in the aforementioned example range of $15,000 to $70,000 per acre that could be way off. That’s why land valuations are inherently harder than improved property valuations and why the appraiser’s business risk is so much higher. There’s just a lot of variables for the appraiser to deal with.
In Part 4, I’ll explain how I would handle all these variables… assuming I got paid well enough to do so.
John Simpson, MAI
Secrets of Appraising Vacant Land – Part 2 of 4
As indicated in Part 1, there are lots of things that can be wrong with a piece of land that will impact its development potential and its value. I’ve already covered many of the key reasons in the following posts:
- Soils – The Realities of Marina Land Part 2
- Wetlands – The Realities of Marina Land Part 3
- Tidal Wetlands – The Realities of Marina Land Part 4
- Flood Zone and Zoning – The Realities of Marina Land Part 5
Ah, but I’ve only just begun to scratch the surface… so to speak. Let’s add some more topics to the list.
Soils Redux
Although I talk about soils in the above marina land blog, there’s a lot more to say. They are important for another reason – growing crops. Agricultural land is a whole world different than what I call development land. Whereas agricultural land is all about crop yields and crop types (mostly due to the soil; we humans can change everything else), development land is all about the number of lots you can get from it (generally for residential homes). It’s like the difference between a science and an art. I’ve found agricultural purchasers are extremely knowledgeable about soil (the science) and developers are knowledgeable about home building (the art). As you might guess, my point is that they are two different markets and they deserve to be treated as two different highest and best uses.
Water Table
The closer the water table is to the surface, the less chance you’ll be able to build a basement or an underground parking garage. Pretty simply, huh? I’m sorry to say that appraisers aren’t engineers and we just can’t consider this except on the rare occasion where we have a small lot and a study is already made available to us.
All of these things affect whether the land is fully buildable or has excess land or surplus land. It’s important because surplus land does not have a market value anywhere near buildable land/excess land.
Access
Most people don’t view access as a big deal. As long as there’s a road, there isn’t a problem. Although the exception to the rule, if you don’t have good access, your property will suffer. Case in point the residential “paper lot” subdivision that was approved but couldn’t get the county to extend the road. Another example is the property that was not allowed a single driveway access because the New Jersey Department of Transportation forbade it (because there was a limit on the number of driveways that were permitted on the highway and it was over the limit). Yes, these were valuation assignments of mine. It’s the difference between developable and undevelopable land and a big market value versus a tiny one.
The Rest of the List
I could go on one site feature after the next, but I think you know the basics. You get the idea. What’s important is that you need to check that whatever the feature is that it doesn’t impair the value, use or marketability of the property or anything you will develop on it. I suppose that summarizes the physical characteristics investigations.
The point is it takes a long time to make the necessary phone calls and inquiries to determine if there isn’t a problem. This is another reason why valuing vacant land is harder than improved properties.
In Part 3, I’ll delve into risk and future development potential.
John Simpson, MAI
Secrets of Appraising Vacant Land – Part 1 of 4
There is one very, very large disconnect between owners/purchasers of vacant land and appraisers. It’s so large that it’s the reason why I do few vacant land appraisals. The disconnect is that owners/purchasers of land think appraising it is easy and just because it’s vacant, the appraisal fee should be less than an improved property. This is pure fantasy because one of the hardest property types to appraise is vacant land, for reasons I shall explain in detail.
It’s What You DON’T See That Makes It Difficult
Let me itemize most of the reasons why appraising vacant land is more difficult than appraising an existing commercial property:
- The zoning will likely allow many uses such as office, industrial, apartments, retail or some other types. That’s a low of possibilities to consider whereas with a commercial property, what you see is what you get. Appraisers often need to test each use and each use takes time to i investigate the rental rates, operating expenses, capitalization rates, etc.
- In addition to “principal permitted” uses, there are also “conditional” uses and “special exceptions”. The latter two require some degree of additional local governmental approval, which can range from easy to impossible. It takes time to do the research.
- For each type of use, the range of potential improvements is staggering in number. There are many variances on the themes of townhouses, single family homes, apartments, shopping centers or other commercial properties.
- It may look like a simple piece of land but there can be a whole bunch of things wrong with it that will greatly constrain what you can build there, if anything at all. Each of these things takes time to research.
- There is no cash flow generated from the land (I’m assuming no land lease), so you’re looking into the future for all incomes and expenses. That future may be years off. We all know how cloudy the crystal ball is when you ask it to work overtime.
- The “market” is made up of many prospective buyers. If you put ten of them in a room, how many would see the property’s development potential differently? If you answered ten, you get a gold star.
- It is not uncommon to have things outside the boundaries of the property greatly impact the development potential. The best example is a municipal moratorium on water and sewer. No water, no development. No sewer, no development (in most cases). You get the point.
It’s worth mentioning again that even with all these items, market participants expect appraisal fees to be lower than improved properties. Since it’s so difficult to develop vacant land, why should the appraisal fee be lower? The reason is simple – appraisers can’t get more money for their analyses, so what they do is cut all the corners they can. The result is almost always a product that can’t stand up to the scrutiny of a good review appraiser. You get what you pay for in America.
In Part 2, I’ll dive into what can be wrong with a piece of land that affects its development potential and adversely impacts its value.
John Simpson, MAI
Retail and Regional Malls are Really Hurting Worse Than Ever
The other day I had a chance to go out to the malls and a couple of stores in smaller shopping centers. It’s a blood bath out there! It’s funny how you hear statistics that this Holiday season wasn’t so bad with only a slight downward drop from last year. The press just doesn’t know what it’s talking about.
Let’s take some examples. Have you ever heard of an after-Christmas sale at Nordstrom? Well, it’s not an official sale, mind you, but lots of stuff has red tags on it with deep discounts (I bought a new jacket for 40% off and I waited two months to buy it hoping prices would drop). There’s even a new couple of tables with 50% off ties. ‘Never seen that before.
Let’s compare Whole Foods to Shoppers. The high-end grocers have cut their prices, in many cases quite dramatically. Just take a mosey on down to Shoppers and what will you see? Yes, the prices are low, but take a look at the people walking around and buying. What bags are they carrying their purchases in? Recycled plastic bottle bags that say Trader Joe or Whole Foods on them. It’s hilarious to see consumers switch to the lowest priced store and yet walk around with high end grocer bags.
Now on to the malls. I’m seeing something I never saw before. There are some wings or locations within a mall where inline bay tenants pay top dollar. Near a food court is one and I’m seeing some temporary tenants in those spaces! They were always the prime spaces for the major national inline bay tenants, but no more. It makes me wonder how much the current retailers have gotten the landlords to lower their rent just to keep them.
Another trend I’m seeing is with kiosks. You know, those little cart-like or small space located in the hallways in single, disconnected row. I’m seeing more vacancy there than ever with more turnover to. A few of the staples such as Orange Julius are also missing.
As for the signs, 50 to 70 percent is the norm. I walked into a well established shoe store and had to leave because they were “only” offering 25 percent off the second pair if I bought the first for full price. I don’t think so. I’d rather go to Macy’s with their 40 percent off just about everything. J.C. Penney’s has 75 percent off everything too and there are some good things for almost nothing that I couldn’t pass up.
Another indication that it’s “dead” is the utter lack of “coming soon” boarded up storefronts in the malls. There’s just no demand for expanding. The recession has been going on so long that realities has fully kicked in. After two poor Holiday seasons, there’s no optimism left in the retailers. As long as the unemployment rate continues to stay around 10 percent, it’s just not going to change. The retailers are in full survival mode and it’s not going to change.
A Business Perspective on Switching from Microsoft Windows to Apple – Part 7 of 7
I’d like to wrap up this series with the funny ironies I see between the Microsoft and Apple camps.
- It’s ironic that big business doesn’t switch yet spends gobs of money on IT solving viruses and other problems that go away with Apple.
- It’s ironic that Apple doesn’t make a more feature-competitive business suite to challenge Microsoft Office.
- It’s ironic that Apple has so very many cheap or no cost add-ons yet has no database or built-in programming functionality on the scale of VBA (Visual Basic for Applications, the macro language of the Office Suite) or .Net.
- It’s ironic that users of Microsoft windows use or would prefer using the Apple OS over Microsoft Windows yet they’re not given a choice by the corporate world.
- It’s ironic that so very many employees use Windows at work yet use Apple at home.
- It’s ironic that when the time comes when big business will finally decide to move to Windows 7 or some other future version of Windows that they won’t do a full cost benefit analysis and compare that to Apple. I’d bet that Apple would be less expensive when this magic time comes even though, ironically, their computer are more expensive.
As for me, I’ve made the switch to Apple as an OS but will keep using the Microsoft Office Suite for my work. I say that today, but don’t be surprised if I switch to iWorks in the future… if nothing else, to just leave the Microsoft-centric world entirely.
John Simpson, MAI