Commercial Investment Real Estate September/October 2019

LEGAL BRIEFS Valuing Retail Properties Assessments can differ, so understand what considerations go into calculating the value of retail properties. A store owned and operated by Lowe’s in Georgia was valued by the local tax assessor at $10.4 million. Not satisfied, Lowe’s counsel hired its own appraiser, who valued the property at $3.9 million. How can these valuations differ by that much on the same property? Market value is, in the most basic sense, what someone will pay for something. But who exactly is someone? When a property owner or her adviser is considering the disposition of an asset, the first question is, “What is the profile of the likely buyer?” Big-box stores, regional malls, and department stores are often occupied by large, well-capitalized retailers who are either ten- ants or owner-occupants. Such properties could be valued based on the premise that they benefit from having well-capitalized occupants. In reality, though, it depends on the situation; differ- ent ownership interests may require that different data be used to develop a credible valuation. What types of ownership interests are marketable to differ- ent types of buyers? What explains the disparity between what different types of buyers will pay? Let’s explore how to match the profile of a likely buyer with the property being valued in the retail segment. Most states tax property on the market value of the fee-simple 18 September | October 2019 interest, including tangible real property. Fee-simple interest is unencumbered by any other interest, such as a lease. Tangible refers to property that you can touch, such as land, buildings, pavement, and fencing. Specifically excluded from tax valua- tions is intangible real property, such as non-physical assets like franchises, trademarks, goodwill, and contracts. Since a fee-simple valuation requires that the value not reflect any actual leases that may be in place, it assumes that the property is available for lease or owner-occupancy. As most real estate professionals can attest, properties leased to a credit tenant often sell for a premium because the security associated with a stable income stream is widely sought after. However, if the property being valued is viewed as if available for lease or owner-occupancy and not as if leased to a credit tenant (regardless of its actual leas- ing status), no premium to reflect a credit tenant is appropriate. This concept is critical to identifying the profiles of likely buyers. • Are the buyers of properties leased to credit tenants also the buyers of properties available for lease or owner-occupancy? Typically no, at least not at a similar price. • Do the prices paid by buyers of properties leased to credit tenants indicate what price could be reached for properties available for lease or owner-occupancy? Again, typically, no. COMMERCIAL INVESTMENT REAL ESTATE by Alvin O. Benton Jr., CRE, MAI and Bradley Carter, CCIM, CRE, MAI

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