So now it’s time to see what good all this library research, crime statistic printouts and two days of lease perusal did for the appraisal. Again, for the brevity of a blog, I will simplify greatly.
The bottom line was the mall was losing money. It had a negative net operating income because expenses increased and the low occupancy meant the owner had to carry most of the expenses. Imagine how negative the cash flow was once you took debt service away from the already hemorrhaging net operating income. The fact that the past three owners could not turn the mall around gave us little confidence that this would indeed occur. Interesting, the purchaser’s projections showed an effective gross income of $6.5 million… I don’t think so.
I find it interesting that as appraisers we must assume competent management. Yet here is an example where the buyer’s projections, more than double what the mall was doing, ignoring the yearly downward spiral and believing they could do better than the past three owners, was just irrational. There was just no other way to put it. As this case shows, even competent management can’t overcome some big problems. Assuming that all new management teams would make a profit is also irrational.
The end result of all this is that the highest and best use of the property was different. We recommend the site to be redeveloped with a mixed-use property that was mostly residential – or all residential if it could be so changed in the zoning. The ironic thing is the buyer used our appraisal to negotiate a million dollars off the purchase price. I didn’t even get a “thank you”.
Today a whole bunch of new residential homes sit on the site. Sometimes stigma is so bad on a property that something else makes financial sense and the highest and best use changes.
In Part 4, I’ll explore another situation where crime affected market value and, ultimately, resulted in a much smaller building being built on a site than what was approved. You’ll really like what I did in this case.
John Simpson, MAI
