All Forum Posts by: Josh Ridpath

In terms of determining fair market value, it's not at simple as dividing NOI by a cap rate. You have to understand what goes into both sides of that equation. Cap rates extracted from other deals are informative but you have to understand each deal and how the cap rate was calculated. Does your estimate of NOI account for vacancy/collection loss? You mentioned that utilities are sub metered. How reliable have tenants been paying those bills in the past? Other expenses to be aware of include: real estate taxes, insurance, utilities, maintenance (excluding Cap Ex), management, janitorial expenses, security, and a reserve for replacement.

In my experience, cap rates extracted from comparable sales are typically calculated based on income in place. On smaller deals, it’s not uncommon for the property to be self managed. These properties may have real estate taxes based on an assessed value that is pretty farm from market if the property has been owned by the same individual for an extended period of time. Meaning, cap rates from other deals may be greater compared to the actual return you might receive. It’s also important to consider the current tenancy. Are the leases below or above market? For how long? This also influences market value.

I think I figured out how they are structured. Their leases seem to reference a guarantor called CH Hold Corp which is based in Texas where the company is headquartered. They have a separate subsidiary for locations in each state the operate in. For example: Caliber Body Works of North Carolina. 

Does anyone have experience with properties leased by Caliber Collision? Looking at listings around the US, they appear to have two business models: Lease a dark car dealership that has a substantial number of service bays or work with a developer to build a new free-standing location that obviously rents and sells for substantially more. Are all of their locations corporate owned or do they have a franchise model?

It’s hard to say. In most jurisdictions, assessments are based on fee simple values and are set at a certain date, say January 1, 2020 (pre pandemic). Some jurisdictions allow tax payers to use new information beyond the date of valuation to appeal a value for the current year and some do not. In a lot of cases, once you’ve passed a certain deadline, your tax liability is locked in for the year due to municipal budgeting constraints and any appeal would be for payments in the future. By then, your tenant may be back on its feet or you may have a new tenant. I recommend talking to a tax appeal attorney and/or appraisal professional in your market to get a better feel for how your county operates. Tax appeal can be complicated and expensive. 

Depending on your market, finding comps will probably be easiest using the MLS. Small stuff like that probably won't be in a service like CoStar or Loopnet. When evaluating a deal like this, it is difficult to find stabilized comps (property that is renovated and leased) in order to extract a cap rate. You'll probably find plenty of sales being purchased by investors planning to do something similar to what you plan to do. Cap rates are difficult to estimate for properties like this.

If you and your partner are going to run the bakery, I'm assuming that you plan to become the tenant and lease the retail suite to yourselves while renting out the apartments to third parties. Research the market to see what the space would rent for. You'll have to do this anyway for accounting purposes at the minimum. Try to keep the rent that you're paying yourself consistent with market norms. From an underwriting standpoint, an appraiser would most likely see the lease between your bakery and yourself as non arms length, absent compelling evidence suggesting otherwise. An estimate of market rent would most likely be substituted for your lease when determining the value of the for lending purposes.

As for bakery equipment, I have no idea. However, this is often considered personal property and usually kept on the tenant's balance sheet.

Costar is probably the gold standard at this point. 

Commercial is a little different than residential. It depends on the market. Are tenant improvement allowances common? On most second or third generation stuff I see in my market, a small tenant improvement allowance, say $5 - $10/SF per square foot to spruce up a space is not uncommon for commercial tenants. This is for stuff like new carpet, paint, and maybe a partition wall to divide the space or something like that. Your market may be different. Call around to some other commercial realtors in the area and see what is typical.

Appraisal is considered “essential”

The calculation for calculating NOI for a NNN leased property is a follows:

Rental Income

+ Reimbursement Income (Tenant reimbursing the landlord for operating expenses)

= Subtotal

- Vacancy/Collection Loss (% Applied to the subtotal)

= Effective Gross Income

- Real estate taxes (Typically reimbursed in a NNN lease)

- Insurance (Typically reimbursed in a NNN lease)

- Maintenance (This will depend on if single-tenant building or multi)

- Utilities (Could be nothing is single-tenant building)

- Management Fees (Typically reimbursed in a NNN lease)

- General/Admin Expenses (Typically reimbursed in a NNN lease)

- Reserve for replacement (Tenants do not typically reimburse for this)

= NOI

NOI/Cap Rate = Market Value

The deal terms you are describing sound typical for a new DG. I agree with Joel that DGs in more suburban areas are more desirable due to the fact that there are some alternative uses in a more populated location if DG vacates the building after 10 years. I've appraised a lot of newly built DGs in very rural areas where the new store is located just down the street from the old store. The old store closes and just sits.