Question

Sammie’s Club wants to buy a 320,000-square-foot distribution facility on the northern edge of a large midwestern city. The subject facility is presently renting for $4 per square foot. Based on recent market activity, two properties have sold within a two-mile distance from the subject facility and are very comparable in size, design, and age. One facility is 350,000 square feet and is presently being leased for $3.90 per square foot annually. The second facility contains 300,000 square feet and is being leased for $4.10 per square foot. Market data indicate that current vacancies and operating expenses should run approximately 50 percent of gross income for these facilities. The first facility sold for $9.4 million, and the second sold for $7.9 million.
Chapter 10 Valuation of Income Properties: Appraisal and the Market for Capital 337
a. Using a “going-in” or direct capitalization rate approach to value, how would you estimate value for the subject distribution facility? b. What additional information would be desirable before the final direct rate (R) is selected?

Answer 1

Both of the properties are comparable to the distribution facility

According to the Capitalization rate approach

Cap Rate = NOI/Comparable sales Price

NOI of first facility = (350000 sq.ft. * 3.9 per sq.ft.) -50%(due to operating exp. and vacancies)

= 682500

Cap Rate = 682500/9400000 =7.26%

NOI of second facility = (300000 sq.ft. * 4.1 per sq.ft.) -50%(due to operating exp. and vacancies)

= 615000

CAP rate = 615000/7900000 = 7.78%

Average Cap Rate = (7.26% + 7.78%)/2 = 7.52%

NOI of distribution facility = (320000*4) -50% = 640000

Value(V₀)= NOI/Cap rate = 640000/0.0752 = $8510638

Information like method to calculate cap rate, i.e average or value weighted and some comparables for age, sale date, physical condition would be desirable before selecting final direct rate