Wednesday, September 14, 2011
Valuing Shopping Centers
Here's my answer to a LinkedIn question () asking about how to value shopping centers... "What a good question! I would test all approaches to get an overall feel for the project. The quick and dirty approach would be to determine the Net Operating Income (“NOI” which is gross revenues less operating expenses not reimbursed by tenants). Then consider roughly how much equity you will be investing. Next, “pay yourself first”! What I mean by that is how much cash flow you would like to have on the equity invested. So, if you’re putting down a million dollars and, based on the quality of the income stream, would be satisfied with say 8% cash flow then merely subtract the $80,000 cash flow from the NOI to determine how much is available to go to pay for debt service. Given an amortization schedule and interest rate available to you, you can now solve for the amount you can afford to borrow. Now, just add this resultant loan amount to the equity to solve for how much you can afford to pay for the center. (Don’t forget to deduct from this value the cost of curing any deferred maintenance. Oh, also deduct tenant improvement costs and commissions for any space(s) that will need to be renewed or released.) When you test the more sophisticated approaches to value, don’t just rely on empirically observed capitalization rates, structure you own hypothetical rate by adding up the components of a cap rate, which are RETURN OF investment plus RETURN ON investment. RETURN OF investment is 100% divided by the useful life of the property. RETURN ON investment is the sum of the percentages that you allow for Safe Rate, Loss of Liquidity, Management and Risk. Empirically observed cap rates only determine the position of the property in the current market. The hypothetically structured cap rate helps you to predict “whither the market goeth”. For a more in-depth answer to your question, download my article entitled RETURN ON that you will find in the Box feature on my full LinkedIn profile. Hope this answer has helped! Good luck with it. David M. Kaufman, CCIM"