How to Value a Vacant Retail Space?

[Dovid Staples]

Hi BP,

There is a small three tenant retail building in an A location that I've known for a while and noticed the tenants suddenly up and moved out. Not that they went out of business, but pretty much just moved to locations almost next door. For a couple other reasons I strongly suspect the out of state owners aren't managing the place very well anymore and I decided to pursue it.

However, I only know how to value a property based on it's cap rate and operating income. I do not know of a formula or set method to value a vacant property. Is it strictly pro forma? And if so is there some kind of discount you give it since it is vacant?

Thanks for your help BP.

[Oscar Pinto]

Here is how I would do it. First find out the follow. I am going to say your 3-unit is 3000 SF (1,000 SF per unit)

1. rent comps in the area. example $2.00/sf/month + NNN

2. absorption rate (how long it takes to rent a space), example 4-6 months

3. vacancy factor, example 10%.

4. commission, 6% of 5-year lease value.

Next, I'd  calculate gross, then adjusted gross, then using the area cap rate I can determine value.

gross: $2 x 3000 x 12 = $72,000/yr

adjust = gross - vacancy (10%) = $64,800.

example area cap rate of 5%. You can determine this by analyzing comps and see what retail is trading for in that area.

pro forma value = $1,296,000.

now the fun part, SUBTRACT holding cost (absorption rate) & commissions.

holding cost on a 5 month average = $30,000

commission = 72,000 x 5 x .06 = $21,600.

Final calculation: $1,244,400.

so you have the calculation and now you can put this in an excel sheet and make your life a bit eaiser.

I hope this helped.