Valuing Your Corporate Property for Sale
I have posted in the past on estimating market value for commercial property and the three most common methods for valuation. The conventional, traditional and acceptable approaches to assigning value to real property are as follows:
- Income Approach
- Replacement Cost Approach
- Market Value (Comparable) Approach
When it comes to investment properties (income-producing), the Income Approach is the most commonly used method and you often hear investors, brokers and appraisers banter about cap rates when discussing value. A multi-tenant or even single tenant property with a lease or leases in place make it easier to project the future cash flow of the asset and apply a value based upon market cap rates for similar properties.
What if there is no Income?
Today, I was reading about the sale of the former Freescale Semiconductor industrial campus in East Austin to a consortium of investors. While no sales price was reported the 935,255-square-foot property was marketed in a brochure for $9 million, or about $10 per square foot, according to the Austin Business Journal. While I am not intimately familiar with the property, it is safe to say this well below the replacement value of the asset. So why is the market value of this asset somewhere in the neighborhood of $10.00 per square foot? The answer lies in the number of user prospects that exist for a 30 year old, 900,000 square foot industrial campus in the current economic environment.
The Value Pyramid (User vs Investor Pricing)
Whenever I am involved a discussion with a client about valuing a commercial property for sale that no longer fits their needs and has no income in place, their motivation from a time perspective to complete a sale is an important discussion. Every asset is different, but the more specialized the highest and best use for the property is, the fewer qualified prospects willing to pay the highest value will exist, and it will typically take longer to complete a sale.
In the case of marketing the Freescale campus in Austin, it was likely a short list of potential 900,000 square foot user prospects who could utilize the property based on the shear size of the asset and if you add the criteria of “as-is’ or without significant modifications it becomes even smaller. However, by valuing the property that makes it attractive to the speculative investor you greatly enhance the population of potential purchasers who are willing to take the risk to re-position the property.
Setting Realistic Expectations (Value vs Marketing Time)
Having the value discussion with your corporate client in terms of asset disposition should extend beyond replacement value and focus on market value in relation to the population of likely candidates and their time constraints to monetize the asset. Promising the moon and setting yourself up for failure will only damage your relationship with the client, particularly if they intend to deploy the proceeds of the sale into another project and timing is critical.
We have all probably used the term “price to sell” at some point in the past, but when having the value discussion with corporate clients we should talk in terms of “price to sale when?” and how that impacts their capital deployment objectives.