Question

Sammie’s Club wants to buy a 320,000-square-feet 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. 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

Property 1 2

Area 350000 300000

Rate of lease 3.90 4.10

Gross income 1365000 1230000

NOI @ 50% 682500 615000

Sale value 9400000 7900000

Capitalization rate 0.072606383 0.077848101

Average capitalization rate 0.075227242

Property

Area 320000

Rate of lease 4.00

Gross income 1280000

NOI @ 50% 640000

Cap rate 0.075227242

Sale value 8507556.331

In million 8.508

b) To determine final rate, it would be interesting to know if there are any differences in the amount of expenditure to be incurred for improvement of the property. Also if terminal cash flows expected is likely to be any different. These qualitative factors could alter the cap rate.