Revised Reconciliation and Final Value Estimate | REV: June 15, 2010
Since the original date of this appraisal, January 20, 2010, the client, Royal Palm Town Center IV, LLLP, has acquired a lease that they would like considered in the valuation of the subject property. The proposed lease is for the entire property, consisting of all 62 units.
Discounted Cash Flow Assumptions Utilized
Forecast Period
Cash flow forecasts and investment analyses were prepared for a ten year period beginning at February 1, 2011. A ten year holding period was utilized based on typical analysis periods reported in various investor surveys of participants active in office properties. An additional year is forecast to determine the sale price at the end of the forecast. We note that a second cash flow analysis was run to estimate the prospective stabilized value. This cash flow analysis begins on October 1, 2010 the date the property is fully occupied and stabilized. This cash flow is also projected out 10 years with an 11th year reversion.
Rental Rates
The first year of the lease is at a net rent of $18.50. This rental rate is increased by $2.87 per square foot per year every year thereafter. It is noted however, that the lessor has provided rent abatement for the first six months of the lease. The lease rates per the term are as follows:
Lease Rental Rates
Year – Net Rent
- 18.5
- 21.37
- 24.24
- 27.11
- 29.98
- 32.85
- 35.72
- 38.59
- 41.46
- 44.33
Absorption
The subject property currently has 54,989 square feet of vacant office space within 41 suites and 29,801 square feet of vacant flex/warehouse space within 19 suites. The proposed tenant will occupy the entire subject property, therefore 100% absorption is allocated.
Lease Terms
The proposed lease if for an initial term of 5 years, beginning on October 1, 2010. The lessee has the right to purchase the subject property in year 4 of the lease at a purchase price of $37,000,000. Should the lessee not purchase the subject property, the lease will automatically renew for another 5 year period, based on the terms of the initial lease period.
The lessor has granted the lessee rent abatement for the first 6 months, excluding CAM charges.
Escalation Revenue
The lease provides for yearly escalations of $2.87 per square foot.
Lease Roll Over Assumptions
We have not assumed that the lessee will elect to use the purchase option. For purposes of the financial projections, we have included the 5 year extension period for valuation purposes.
Potential Gross Revenue
Using the Argus lease analysis program, Potential Gross Revenues consists of Base Rental Revenue plus $2.87 per square foot rent increases. Potential Gross Revenues in Year 1 were estimated at $784,308. This increased to $2,055,310 in Year 3 as the property attains stabilized occupancy. By the end of the holding period it increases to $3,758,741.
Vacancy and Collection Loss Allowance
We have not included any vacancy or collection loss allowances due to the fact that there is one tenant with a 5 year initial term and automatic 5 year extension.
Effective Gross Income
Effective gross income in Year 1 is projected at $1,136,231. This increased to $2,477,595 in Year 3 as the property attains stabilized occupancy. This increases to $4,327,337 in Year 10.
Operating Expenses
We have used the previous expenses provided by the owner that were used in the previous analysis. Total operating expenses are estimated at $4.31 per square foot. A summary of the expense can be seen below.
Real Estate Taxes – As stated taxes for the subject property were $157,761 for 2009
Insurance – We were provided with the insurance costs for 2009, which totaled $59,505 foe the entire development, which is paid for by the association and collected on a pro rata basis through the association dues.
The estimated annual insurance cost for comparable properties is $1.00 per square foot. We have used the figure for the entire association for our analysis.
Repairs and Maintenance – The expense records provided by the owners show maintenance and repairs, cleaning and grounds maintenance budgeted at $1.42 per square foot for 2010. The records show that they have only spent $0.61 in 2009. We have estimated this cost at $0.95 per square foot for 2010.
Utilities – Utilities costs for the common area of the subject property are budgeted at $0.25 per square foot and we have used $0.25 per square foot in our analysis.
Management – Typical management fees range from 3% to 5% of effective gross income. We have estimated a management expense for the subject office building at 4% of all effective gross revenue. This expense is sufficient to obtain competent professional management and reflects the current trend in Palm Beach County toward economically sound management fees. This equates to approximately $0.37 per square foot in Year 1, increasing to $0.85 in Year 2 and up to $1.77 in the final year of our analysis.
The total operating expenses for the subject property are estimated at $4.15 per square foot in Year 1. All expenses are escalated at 3.00% per year through out the holding period.
In comparison, the comparables indicated operating expenses ranging from approximately $3.00 to $5.00 per square foot for the flex/warehouse properties and from $5.00 to $8.00 per square foot for the office condominium units. The majority are between $5.00 and $7.00 per square foot. Typically the operating expense are passed through to the tenants. For purposes of our analysis, we have estimated a gross rental rate at a market level that would fix expenses to a tenant and encourage lease up without having to give significant leasing concessions or free rent. This should give the subject a slight competitive advantage.
Total operating expenses are estimated at $351,923 in Year 1 or $4.15 per square foot. These expenses escalate to $568,596 or $6.70 per square foot by the end of the holding period.
Net Operating Income
Net operating income for the subject property is calculated at $784,308 in Year 1. For purposes of estimating the value of the property at stabilized occupancy via direct capitalization, we used the 12 months following stabilization projected as of October 2010. This net operating income for the 12 months (10/11-09/12) is estimated at $1,811,962. This can be seen in the Direct Capitalization Value Summary.
Leasing Commissions
Leasing commissions were forecast based on discussions with several leasing agents. The prevailing rate in the market is 5.0% of the net rent on new tenants. We have projected lease up cost at 5.0% for new tenants paid in the first year.
The purpose of this appraisal is to estimate the market value of the leased fee interest in the subject property in, “as is” condition, and upon stabilization as of the effective date of the appraisal.
In estimating market value of the subject “as is” and “as stabilized”, we have utilized the techniques of the income approach and sales comparison approach, which yielded respective value indications as follows:
“As Is”
Direct Capitalization As of February, 2011 $ 9,803,844
Direct Capitalization As of February, 2016 $31,177,505
“As Stabilized”
Direct Capitalization As of October, 2015 $31,775,053
