American
Appraisers
Corporation
Appraisers
Corporation
(502) 267-6320 Office
(502) 267-6344 Fax
10801 Electron Drive, Suite 308
Louisville, KY. 40299
(502) 267-6344 Fax
10801 Electron Drive, Suite 308
Louisville, KY. 40299
LOUISVILLE MARKET AREA AND ANALYSIS:
SUBJECT MARKET AREA AND ANALYSIS:
Neighborhood is defined as follows: A group of complementary land uses; a congruous grouping of
inhabitants, buildings, or business enterprises.
The subject property is located within the boundaries of the Louisville Metro Area. The city of Louisville
merged with the Jefferson County government in 2003, which made Louisville the 16th largest city in the
United States, based on area.
The general area where the subject is located is south of Interstate 71 in an area bordered by Interstate
64 (east-west corridor) to the east and Interstate 65 (north-south corridor) to the west. The southern
boundary of the subject’s market is the Henry Watterson Parkway which is a transportation loop in the
Louisville Metropolitan Area. The subject is located in an area of Louisville know as Phoenix Hill.
More specifically, the subject is located on Baxter Avenue, Hull Street and Barret Avenue, near the
corner of Baxter Avenue and Barret Avenue. The subject’s parcel is such that it fronts on all three
streets with addresses on Baxter and Barret Avenues. Baxter and Barret Avenues are main
thoroughfares in Phoenix Hill along with Lexington Road and Bardstown Road which intersects with
Baxter Avenue. The submarket of Phoenix Hill is an old section of Louisville with an exciting past. The
subject’s site once housed the Phoenix Hill Brewery which was a very popular locale in early Louisville
history and dates from around 1865. The area around the brewery developed into a collection of typical
main street retail buildings with second floor apartments or offices as well as supporting industrial sites.
This eclectic history has morphed into today where these varied mix-use buildings have evolved into a
myriad of different uses. These uses include mostly retail, office and apartment. Industrial use in this
area has waned in favor of other locations in the Louisville area. The subject’s property, though only 65
years old has seen its own use change over time. The subject once housed a diesel engine school and
now has warehouse, retail and office space within the improvements.
Just east of the subject property is an older mix of residential housing beyond which is Interstate 64.
Just south and east of the subject property less than .5 miles is the premier cemetery in this area. It is
called Cave Hill Cemetery and its’ northern boundary is southeast of the subject property. Further west
is Beargrass Creek beyond which is the start of the Central Business District (CBD). Baxter Avenue itself
becomes Bardstown Road further south. Just north of the subject property beyond Interstate 71 is the
Ohio River.
This general area has seen some new development and/or restoration over the last 30 years, yet still
has somewhat of an older inner city look and feel to it. The development of the surrounding area dates
back well before 1900. While this area did suffer decline in the past, there has been a movement
towards renewal over the last 30 years. Some of the older buildings have been razed and replaced with
new ones, but many of the original buildings remain in this area, some in restored condition. Overall,
the subject’s neighborhood is considered to be stable with a likelihood of slow, but continued renewal.
As the economy improves, demand should increase in this area.
The Site to Do Business (STDB) web site reports the following demographic information for 2010 within
a 3-mile radius of the subject:
Population: 105,588
Total Households: 50,105
Families: 20,807
Avg. Household Size: 1.95
Owner Occupied Units: 20,923
Renter Occupied Units: 29,182
Median Household Inc: $36,821
Avg. Household Inc: $51,858
Per Capita Income: $25,435
DESCRIPTION OF REAL ESTATE APPRAISED
IDENTIFICATION OF THE SUBJECT:
The subject property is recorded in Deed book 7604 Page 0461. The property is further identified as
Block 068C Lot 0123 with a mailing address of 514 Baxter Avenue & 509 Barret Avenue, Louisville, KY
40204, in the county of Jefferson.
ZONING:
The site is zoned C-M, Commercial Manufacturing. The C-M, Commercial Manufacturing zoning is
intended to allow all uses permitted in this class for commercial/manufacturing uses. Additional details
on this zoning can be found at the website for the Jefferson County Land Development Code.
ASSESSMENT HISTORY:
The property is assessed by the Jefferson County PVA at $238,710 land, $457,300 improvements, for a
total of $696,010. The last assessment is dated 01/01/2007.
TAXES:
The subject property is subject to Jefferson County tax rates of 1.31% per $100 of assessed value. By
state statute, properties in Kentucky are required by law to be assessed, for tax purposes, at 100% of
market value. If the property sold, the assessment would likely be updated; in such cases, the PVA
typically bases the following year's assessment on the sale price. If taxes are calculated based on the
final value concluded in this report of $700,000, the estimated tax burden for the following year would be
$9,198.
REASONABLE EXPOSURE TIME
In the Statement on Appraisal Standards No.6 (SMT-6), Exposure time is defined as follows: "The
estimated length of time the property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a
retrospective estimate based upon an analysis of past events assuming a competitive and open
market."
Exposure time is different for various types of real estate and under various market conditions. It is
noted that the overall concept of reasonable exposure encompasses not only adequate, sufficient and
reasonable time but also adequate, sufficient and reasonable effort. The reasonable exposure period is
a function of price, time and use.
SUBJECT PROPERTY EXPOSURE TIME:
Based on interviews with brokers and others involved with some of the comparable sales indicates
that approximately 9 to 12 months is reasonable exposure time for this type of property at the market
value level estimated in this report. Based on this information, it is our opinion that the estimated
reasonable exposure time for the subject property would have been 9 to 12 months prior to the effective
date of this appraisal.
SITE SUMMARY
Location:The subject is on Baxter Avenue between Barret Avenue and Hull Street.
Gross Site Area: 34,173 SF (0.7845 acres)
Excess Land: None.
Surplus Land: None.
Primary Road Frontage: Baxter Avenue
Secondary Road Frontage: Barret Avenue
Additional Road Frontage: Hull Street
Primary Traffic Counts (24 hrs.):10,827 cars per day in 2010.
Secondary Traffic Counts (24 hrs.):5,785 cars per day in 2009.
Zoning District: C-M, Commercial Manufacturing,
Flood Zone(s): X – The subject is not located in the 100-year flood plain according to flood map number
21111C0042E, dated December 5, 2006.
Parking: There is a paved parking lot in front of 514 Baxter Avenue with approximately 25 lined parking
spaces. The parking lot has some additional space in it, which may allow for additional parking. On the
Barret Avenue side, the parking lot has approximately 8 lined parking spaces. There is street parking on
Hull Street and the surrounding neighborhood. Overall parking appears adequate.
Landscaping: The subject’s site has some landscaped areas which mostly include the left rear of the
site which has no improvements. In this section of the site, there is mostly natural growth with grass,
shrubbery and trees. In addition, there is a grass mowing strip in front of 509 Barret Avenue. The
landscaping is in overall average condition.
Shape and Frontage: The parcel is irregular in shape, but mostly resembles a “T” shape.
Ingress/Egress: There are two curb cuts off Baxter Avenue and one off Barrett Avenue.
Topography and drainage: The subject’s site is not level. At the front of the site on Baxter Avenue, it is
level to the rear of the site. On the north side of the subject’s “T” lot, the elevation drops down to Barret
Avenue. On the south side of the “T” lot, the elevation rises to Hull Street. At the top of Hull Street,
there is a level pad at street level.
The topography of the site is not seen as an impediment to the development of the property. With
the exception of the Hull Street side of the subject’s parcel, the entire site is developed. The elevation
differences on the Hull Street side of the parcel might be developable depending on other factors such
as soils testing, engineering determinations, and final determination of the subterranean bunkers, etc.
During our inspection of the site, we observed no drainage problems and assume that none exist. The
site appears to drain towards the right side or the front of the subject’s site. The front of the site is also
sloped slightly towards the street and to the right allowing excess runoff to drain in that direction.
Soils: A soils analysis for the site has not been provided for the preparation of this appraisal. In the
absence of a soils report, it is a specific assumption that the site has adequate soils to support the
highest and best use.
Man-made subterranean bunkers: The subject property has two unique historic features within the
property lines. The subject’s site is the former Phoenix Hill Brewery which dates back to 1865. The
brewery constructed underground storage vaults for their alcoholic products. These underground
bunkers, constructed of limestone were collapsed in order to build the original improvements in 1947.
The un-collapsed ends of these bunkers are on the subject’s site as it abuts Hull Street. The current
owner excavated the rubble from these two bunkers and exposed an approximately 60 foot length of
remaining bunker. These historic features could add value if deemed safe and if the current
improvements were to be used for some enterprise that could benefit from their existence.
Easements and encroachments: Based on an inspection and review of the subject deed, the property
does not appear to be adversely affected by any easements or encroachments. It is recommended that
the client/reader obtain a current title policy outlining all easements and encroachments on the property,
if any, prior to making a business decision.
Covenants, conditions and restrictions:There are no known covenants, conditions and restrictions
impacting the site that are considered to affect the marketability or highest and best use.
Utilities and services: The site is within the jurisdiction of Jefferson County and is provided the following
municipal services:
-Police
-Fire
-Garbage collection
-Water
-Electricity
-Sanitary Sewer
-Storm Sewer
-Telephone
Adjacent properties:
The adjacent land uses are summarized as follows:
North: Commercial corridor with mixed residential beyond.
Southeast: Commercial corridor with cemetery land beyond.
South: Commercial corridor with mixed residential beyond.
East: Commercial corridor with mixed residential and an interstate corridor beyond.
West: Commercial corridor with mixed residential beyond.
IMPROVEMENTS:
The subject property’s site is improved with a 19,363 SF, 2-story multi-tenant retail/office/warehouse
building. The improvements were built in 1947, though it appears that the front section was probably
built sometime after that. The current owner acquired the property in 1976 and did no additions. It is
used as an owner-occupied property though there is one retail space that is leased and additional office
space that is vacant. Some sections of the property are in overall average condition, while other
sections are in good condition.
The improvements have a poured concrete slab, exposed concrete block wall construction with metal
siding. The warehouse industrial sections have a steel framed superstructure. The roof is slightly
pitched with different sections depending on the ceiling heights. The roof has been renewed within the
last 2-12 years with the exception of one small section. That one remaining section has fiberglass
shingles, while the majority of the roof was renewed with a single-ply material. The windows are wood
and metal framed and the doors are aluminum or steel. There are four bay doors, three in the industrial
warehouse sections and one in the leased retail section.
The warehouse interiors are mostly open with some separation build out to create separate work spaces
within the warehouse sections. The front retail unit was built out of the larger warehouse section. The
retail section on the 1st floor on Barret Avenue was finished with showroom, offices and a garage unit
for repairs. The 2nd floor office section on Barret Avenue is partitioned into office and reception space.
There are six bathrooms in the building. The interior sections appears to have been built out with wood
framed walls with drywall; fluorescent lighting and either bare concrete, commercial grade carpeting,
vinyl and/or tile flooring. The property owner operates a tile business from the premises, so there is a
lot of high quality finished tile work in the different sections of the improvements.
DESCRIPTION OF THE IMPROVEMENTS
Building type:Retail/office/warehouse
Number of stories: 2-story
Year Built: 1947
Occupancy type: 80% owner occupied, 20% tenant occupied
Overall condition: Subject is in overall average to good condition depending on the different sections in
the improvements.
Building size: 19,363 SF
Floor area ratio: 56.66%
Foundation: Concrete slab
Basement: None
Superstructure: Concrete block construction and steel frame.
Exterior walls: Concrete block and metal siding.
Windows and doors:Wood framed and aluminum fixed and non-fixed windows and aluminum and metal
exterior doors.
Roof: The roof is of a gable design but with only a slight pitch. Because of the elevation differences in
different parts of the improvements, the roof is cut up accordingly. The roof has fiberglass shingles on
one small section, while the remaining sections were renewed with a single-ply material.
Ceiling material: Drywall or ceiling tiles
Ceiling height: The building is approximately 16 feet tall at its’ highest point. The warehouse sections
vary in height and range from 14-16 feet tall. The interior ceilings are approximately 8-9 feet tall
depending on what section of the building.
Interior walls: Wood framed interior walls with drywall.
Floor: Concrete slab base with varying flooring finishes including commercial grade carpeting, vinyl
and/or tile flooring.
Lighting: Recessed and open fluorescent lighting.
HVAC: Gas forced air furnace and central air conditioning with one space heater in the warehouse
section.
Utility meters: The building has one set of electrical and gas meters.
Elevators: None.
Sprinklers: None.
Restrooms: There are six restrooms in the property.
Functional utility: The subject is of average design functional as a single or multi-tenant retail space.
The subject is such that even though there are separate spaces for numerous tenants, the building is
accessible throughout the different spaces.
Special features: None.
ENVIRONMENTAL ISSUES: American Appraisers has not observed and is not qualified to detect, the
existence of potentially hazardous material or underground storage tanks which may be present on or
near the site. The existence of hazardous materials or underground storage tanks may affect the value
of the property. The presence of substances such as asbestos, urea formaldehyde foam insulation or
other potentially hazardous materials may affect the value of the property. For this appraisal, American
Appraisers has specifically assumed that the property is not affected by any hazardous materials that
may be present on or near the property.
The subject was built prior to 1978 and as such may contain hazardous building materials such as
asbestos, lead paint or urea formaldehyde foam insulation.
In addition, the subject has two man-made subterranean bunkers on the property. These were
constructed out of limestone before 1900. This appraiser has no expertise in underground bunkers,
their safety concepts or of the engineering of such as it pertains to underground bunkers and the
surrounding soil. The bunkers are currently exposed and accessible.
Unless otherwise stated in this report, the existence of hazardous material, which may or may not be
present on the property, was not observed by the Appraiser.
HIGHEST AND BEST USE ANALYSIS
Highest and best use is defined as follows:
The reasonably probable and legal use of vacant land or an improved property, which is physically
possible, appropriately supported, financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility, physical possibility, financial
feasibility, and maximum profitability .
Highest and best use gives consideration to the possible, physical, feasible, legal and permitted uses
which would provide the highest net return to the owner of the site under current market conditions.
Physically Possible: The physical characteristics of a site can affect the uses to which it can be put.
These characteristics can include size, location, shape, topography, easements, utility availability, and
surrounding property uses.
Legally Permissible: Except for a legally non conforming property, the first step in determining what is
legally permissible is to analyze private restrictions, zoning and building codes, historic district controls,
and environmental regulations.
Financially Feasible: The uses that are physically possible and legally permissible must be analyzed
further to determine those that are likely to produce a positive return greater than the combined income
needed to satisfy operating expenses, financial expenses, and capital amortization. All uses that are
expected to produce a positive return are regarded as financially feasible.
Maximally Productive: Among financially feasible uses, the use that reflects the highest rate of return (or
value) constitutes the highest and best use.
Implied in this definition is that the determination of highest and best use takes into account the
contribution of a specific use to the community and community development goals as well as the
benefits of that use to individual property owners. Hence, in certain situations, the highest and best use
of land may be for parks, greenbelts, preservation, conservation, wildlife habitats, and the like.
An additional implication is that the determination of highest and best use results from the appraiser's
judgment and analytical skills; that is, that the use determined from analysis represents an opinion, not
necessarily a fact to be found. In appraisal practice, the concept of highest and best use represents the
premise upon which value is based.
HIGHEST AND BEST USE OF SUBJECT
Legally Permissible: The subject’s C-M zoning allows for a variety of types of commercial uses. The
existing improvements conform to the prevailing zoning codes for the C-M zoning, surrounding land use
patterns, and are not restricted by any known deed restrictions; therefore, the subject improvements are
legally permissible.
Physically Possible: Currently the property is an improved site that has 34,173 SF (0.7845 acres).
The physical characteristics of the subject’s site are adequate to accommodate improvements, which do
not require a larger land size. The subject is currently improved with a 2-story, 19,363 SF retail, office,
and warehouse building; therefore, the subject improvements are physically possible.
Financially Feasible: The subject is located on Baxter Avenue. There are numerous other
developments in this area and this area is seen as an average location for retail, office and warehouse
development in Jefferson County. Therefore, a use similar to the subject is financially feasible.
Maximally Productive: The improvements currently in place are consistent with the highest and best
use as though vacant, and the value associated with the existing improvements is higher than the value
of the site as though vacant. Therefore, as improved, the current improvements appear to represent
the highest and best use for the subject.
However, during the research process for this appraisal, an alternative scenario was realized and is
explained as follows.
The subject property has a unique parcel in that it fronts three different streets in an area of Louisville
that is experiencing change. The subject property has been offered for sell for over a year and had a
prior listing at $1,200,000. It is now listed for $982,000. According to the listing agent and the owner,
there has been interest, but the layout and functionality of the property is such that prospective buyers
have struggled with their own abilities to visualize the full utility of the improvements and site. This has
resulted in no offers as of the date of this appraisal.
The property has been advertised as both industrial and special purpose. In looking at the subject
critically and given the changing dynamics in the Phoenix Hill area, American Appraisers feels that the
subject is not being marketed correctly. The subject would probably benefit from a change in marketing
strategy from industrial to retail or for possible new development. The subject, if given the right boost of
capital might achieve success as a retail bar/restaurant. It has great open warehouse space with office
space and might command a significantly higher price per SF if leased like other retail establishments
along this eclectic commercial corridor. In addition, the subterranean bunkers, if deemed safe, could be
incorporated into some type of retail plan, thus rendering any establishment at an eclectic advantage.
For example, utilizing the bunkers as an outdoor bar area would create enough “buzz” and could give an
establishment an edge over similar competing properties.
Even the leasing aspect for the subject property has been inadequate. The vacant office space on the
2nd floor has been vacant for 5 years. Even in a bad market, a different marketing strategy and better
pricing could solve this problem. The warehouse space has also been unsuccessful in finding any
tenant at all either for one of the smaller spaces or for the entire warehouse space.
The subject is in a prime location in the Phoenix Hill neighborhood and complete redevelopment is
possible. This would require the coordination of resources, the planning and development approval
process and various other steps to determine the best options for this site. The overall financial
feasibility would need to be determined, but the location, the unique lot and the historic bunkers could
be utilized in a successful bid for redevelopment. This type of in-depth analysis is beyond the scope of
this appraisal.
The subject is currently an underutilized property with strong potential for improvement and a potential
increase in value.
Conclusion:
Based on this analysis, the current highest and best use of the subject property is the existing
improvement as a retail/office/warehouse property. These thoughts are carried through to the valuation
section of the report.
INCOME APPROACH
The Income Approach is the valuation procedure in the appraisal process, which converts the
anticipated future benefits (dollar income and amenities) to be derived from property ownership into a
value estimate. The Income Approach is strongly applicable in appraising income producing properties,
as it is a measure of the extent of what benefits might reasonably be expected. The anticipated future
income and/or property reversion at the end of the projection (or ownership) period are translated to a
present worth value through the capitalization process. The basic principles of real property value
suggest the existence of a predictable relationship between income and value. The objective of the
Income Approach is to measure this relationship by analysis of market data.
The steps involved in the Income Approach process are summarized as follows:
1) Estimate potential gross income.
2) Estimate and deduct a vacancy and collection allowance to derive effective gross income.
3) Estimate and deduct expenses of operation to derive net operating income (net income before
recapture).
4) Estimate remaining economic life or the duration of the pattern of the projected income stream.
5) Select an applicable capitalization method and technique.
6) Develop the appropriate rate or rates.
7) Complete the necessary computations to derive an economic value indication by the Income
Approach.
SUBJECT LEASE HISTORY:
The subject property is an owner-occupied single or multi-user retail/office/warehouse building. The
owner has occupied the premises for approximately 36 years since 1976. The property is owned by an
individual who in turn leases out part of the premises for his own business and leases out unused space
to third parties. The only tenant that is currently installed in the subject property pays $1,804 per
month or $5.84 per SF/year in rent on a modified gross lease for 3,705 SF of space. The tenant is
responsible for some of the utilities. Separate analysis has been done in the income approach to
determine the appropriate price per SF for the un-leased space and the overall value in the income
approach. The NNN value of the subject’s existing lease has been calculated to be $4.96 per SF/year.
This property should be treated as a NNN lease where all costs associated with the property would be
paid for by the tenant. The income approach will be done on that basis.
COMPARABLE LEASE DATA AND SELECTION OF SUBJECT LEASE RATE
The subject property is located in an area with a wide variety of property types, ages, conditions and
utilities. The subject’s general location is tucked in between the Central Business District, Interstates 71
and 64 and Cave Hill Cemetery, the subject property’s immediate area is difficult to define in terms of
lease value. The subject’s location near a corner lot enjoys good traffic flow and is surrounded by
mostly older residential and commercial properties with some newer development scattered throughout.
The subject’s specific location is at the beginning (northern boundary) of the Bardstown Road
commercial corridor. This section of Bardstown Road known as the Highlands pretty much ends at
Phoenix Hill Tavern located about one block away from the subject property. Therefore, the subject is
just outside of the most prized section of the Bardstown Road corridor. However, a large development
at the subject’s location would extend the desirable corridor to include the subject.
That said, the subject is currently beyond the most desired area and has been difficult to lease. I
believe that if we were in a healthy expanding economy, the building would sell or lease to a single-user
in the entertainment industry such as a large restaurant or bar. Given the poor rental history of the
subject, the lease rates currently being offered are used as a ceiling for the lease rates even though
there is evidence that would suggest a market lease rate should be higher.
Newer properties in this area do tend to lease for a higher amount than older properties. The subject
property would be considered an older property within this neighborhood.
Because the subject is a unique property with retail, office and industrial space, it is difficult to determine
lease rates for a combination building such as the subject with varying utility types. Therefore, it is
necessary to separate the utility factors and determine appropriate lease rates for each of the different
utility types. Two comparable leases for each property type (retail, industrial & office) were selected.
The two retail lease comps are $4.96 and $5.74 per SF/year as NNN leases. The two industrial lease
comps are $3.15 and $3.57 per SF/year as NNN leases. The two office lease comps are $7.89 and
$4.00 per SF/year as NNN leases. All six of these leases are in the subject’s general neighborhood.
Given the ultimate unknown utility for the subject’s leases, it could be realized that one entity could lease
the entire property for an amount different from what the market demonstrates for the individual
sections. Often warehouse space requires some office space and retail space often requires
warehouse or even office space depending on the type of business.
In addition, it is noted that the subject is currently listed for $7.00 per SF/year for the office section and
has an expired listing for $4.32 per SF/year for the industrial section and neither has leased at those
prices. Given the comparable office leases and the failed attempts at $7.00 per SF/year, a price for the
office at $6.00 per SF/year will be used in the income pro-forma. A price per SF for the warehouse
space of $4.00 per SF/year will be used in the income pro-forma as the $4.32 per SF/year did not result
in a tenant. The retail space will use the current lease amount of $4.96 per SF/year on a NNN basis.
The selected lease amounts do not include any tenant improvements that may be added to the lease.
The differential between NNN leases and gross leases was calculated to be approximately 15% and that
amount was used for the lease comparables. The 15% was determined by the difference in the subject
property’s income as a NNN lease and as a gross lease.
VACANCY RATE:
The subject property is a mixture of retail, office and industrial usage, but would be best suited as a
single-tenant retail/office/warehouse property. However, it can be and is currently divided into separate
sections. Only one section is currently leased, while the owner occupies the remaining space. A typical
vacancy rate for a mixed use property in this area ranges from approximately 5% to 25% depending on
location, condition, price per SF and size. Smaller spaces tend to lease more easily than larger
spaces. Multi-tenant spaces have the advantage of leasing out different spaces to different users. The
subject property has three such distinct uses, but has suffered from high vacancy which is due to a
variety of issues. These issues include configuration, access, price and condition. While it is ideal for a
single-user, finding the one single user has been difficult. It is estimated that with proper marketing it
would take from 10-18 months to locate a suitable long-term tenant for the subject property.
Given that the property would probably lease for a significant period of time, 3-5 years, a vacancy rate
from 15% to 25% over a 4-6 year period would not be unexpected. Given the realities in this current
market and the history with this particular property, we will conclude a vacancy rate at 20% including
frictional vacancy and credit loss. This would allow time for the property to mature in the open market in
order to attract a tenant that can fully utilize the subject property to the fullest extent.
EXPENSES:
The subject would most likely lease to a single tenant on a NNN basis where all expenses are passed
through to the tenant. The subject’s lease will be analyzed in totality on a NNN lease, where all taxes,
insurance, and maintenance will be paid by the tenant. Real estate taxes are based on the value
conclusion of the appraisal report. A management fee of 5% is used as a variable expense. A leasing
commission of 3% is also used and is shown in the income pro-forma.
RESERVES:
Market participants generally quote overall capitalization rates for properties of similar size, quality, and
value range without the inclusion of reserves. Reserves can be included in the selection of an overall
capitalization rate. In this example, reserves are set aside and included in the income pro-forma.
Reserves include items considered capital improvements such as the roof, HVAC equipment and the
asphalt parking lot. The HVAC and asphalt parking lot costs were estimated and the roof costs were
given by the owner as most of the roof has been replaced in the recent past. These costs are
illustrated in the table below:
OVERALL CAPITALIZATION RATE SELECTION
The overall capitalization rate is based on two sources of data. The primary source of our overall rate is
based on extracting these rates from market sales. This method is known as market extraction.
The second method is the mortgage equity analysis also known as a built up rate. This method uses
known mortgage requirements and combines them with investor equity requirements to arrive at an
overall capitalization rate.
MARKET EXTRACTION
The chart below was an attempt to estimate a capitalization rate from the actual comparable sales used
in the sales comparison approach. The rents are extracted from the comparable sale or are estimated
from the market. A NNN lease is assumed. A 20% vacancy rate was taken out and reserve rates were
calculated using a similar technique to what was used in estimating the reserves for the subject
property. That reserve rate came to $.215 per SF and was used in this analysis.
While this analysis is helpful as a guideline in choosing an appropriate capitalization rate, a lack of
complete data hinders a more comprehensive and foolproof outcome.
MORTGAGE EQUITY ANALYSIS
The built up method essentially constructs an overall capitalization rate RO based on requirements
typical in the market such as typical mortgage interest, loan to value, risk etc.
Expressed algebraically,
RO = (RM * M) + (RE * {1-M})
Given:
RO = Overall Capitalization Rate
RM = Mortgage Constant
RE = Rate to the equity position
M = Loan to value ratio
The band of investment technique has been utilized as a crosscheck to the foregoing technique. The
overall rate implied by the band of investment technique is 9.02%. The analysis is shown in the
following table to the left.
CONCLUSION OF OVERALL RATE
The market extracted sales indicate a capitalization rate between 8.26% and 10.02%, with a median of
8.69% and a central tendency (mean) of 8.94%. The band of investment is used as a check to the
market extraction technique and implies a rate of 9.02%. Both methods reflect a similar capitalization
rate (rounded), therefore, a rate similar to these two will be used in the income pro-forma. The rate used
in the income pro-forma is 9.00% and is considered to be well supported.
SALES COMPARISON APPROACH
The Sales Comparison approach is essential to almost every appraisal of the value of real property.
The application of this approach produces an estimate of value of a property by comparing it with similar
properties of the same type and class which have been sold recently or are currently offered for sale in
the same or competing areas. The sales prices of properties judged to be comparable tend to set the
range in which the value of the subject property will fall. Further consideration of the comparative data
will indicate to the appraiser a figure representing the value of the subject; that is, the probable price at
which it could be sold by a willing seller to a willing buyer as of the date of the appraisal. The data
involved in the application of this process concerns comparable properties as well as the subject
property, and will vary with the type of property.
In appraisal practice, the sales comparison approach is a set of procedures in which a value indication
is derived by comparing the property being appraised to similar properties that have been sold recently,
then applying appropriate units of comparison and making adjustments to the sale prices of the
comparables based on the elements of comparison. The sales comparison approach may be used to
value improved properties, vacant land, or land being considered as though vacant: it is the most
common and preferred method of land valuation when adequate supplies of comparable sales are
available.
QUALITY AND QUANTITY OF DATA:
Numerous comparable sales were considered in the sales comparison approach and five sales were
utilized in the analysis.
For this particular property, both the income approach and the sales comparison approach are
suitable. In an income generating property, adjustments for location, condition, age and other factors
are pre-determined by the rents paid and the income generated. Because both approaches are utilized
with income being a key factor, no specific adjustments were made for these categories.
Instead, a rent differential adjustment was calculated to illustrate the income variables in the different
comparables. The rent differential allows for a property to be analyzed strictly on its income producing
abilities. The net operating income (Io) is divided by the square footage of the property to come up with
a price per SF based on the Io. The difference between the price per SF for the subject’s Io and each
comparable is calculated. This difference is the price per SF rent differential.
This in turn is multiplied by the square footage of the comparable and then capitalized at the Ro rate
established for the comparable which gives us a lump sum adjustment. This amount is either positive or
negative and accounts for the actual rent differential adjustment.
Due to the lack of actual rental data, rental amounts for some or all of Comparable Sales 2 – 5 in the
rent differential were estimated from the market.
Comparable 1 is the sale of a large industrial/office building very similar to the subject property. This
property has two buildings, 2306 and 2320 Frankfort Avenue. This property has 4,000 SF of
office/showroom space with the remainder being warehouse space. The blended rate of rent of this
property is $5.38 per SF/year. Both buildings were leased as of the date of sale.
Comparable 2 was the sale of a two-story mixed use property on Bardstown Road. This property was
vacant as of the date of sale and the rental amount for the rent differential was estimated. The first
floor is suitable for retail or office and the 2nd floor is suitable for office or apartment conversion. A call
to the listing agent was not returned.
Comparable 3 was the sale of a retail/office property with three buildings. All three buildings are on one
parcel. This property is on a one-way street. It is in excellent condition. Per the listing agent, Tim
Stephens, the property was fully leased as of the date of sale, but the buyer eventually occupied the
entire property as the leases expired.
Comparable 4 is the sale of a mixed use property on Bardstown Road. The property has a retail space
in the front, an apartment in the middle section and warehouse space in the rear. There is some
parking in the rear of the site. The buyers later spent approximately $100,000 on renovations after the
date of sale. The retail and apartment spaces were later leased to a family member and friend, but
appear to have been at market rates. This property was appraised earlier this year by American
Appraisers.
Comparable 5 is the sale of a industrial building with office space on Baxter Avenue. The property was
vacant as of the date of sale and was purchased for use by an owner-occupant. The sale was verified
with the buyer. The property, built in 2005 was in good condition as of the date of sale.
The adjusted unit values of the comparable sales are as follows:
Comparable 1 $38.43 per SF
Comparable 2 $40.10
Comparable 3 $32.91 Comparable 4 $35.92 Comparable 5
$35.67
The above comparable sales indicate an adjusted value ranging from $32.91 per SF to $40.10 per SF
for the subject property. This range is very tight and is reflective of the market in this section of
Louisville. The adjusted comparables have a median of $35.92 and a central tendency of $36.61 per
square foot of building improvements.
The range of values is quite small and well supported. A value between the median and the mean is
justified, so a price of $36.00 per SF is chosen to best represent the subject property.
19,363 SF @ $36.00 per SF = $697,068
VALUE BY SALES COMPARISON APPROACH $700,000
ROUNDED
SUBJECT MARKET AREA AND ANALYSIS:
Neighborhood is defined as follows: A group of complementary land uses; a congruous grouping of
inhabitants, buildings, or business enterprises.
The subject property is located within the boundaries of the Louisville Metro Area. The city of Louisville
merged with the Jefferson County government in 2003, which made Louisville the 16th largest city in the
United States, based on area.
The general area where the subject is located is south of Interstate 71 in an area bordered by Interstate
64 (east-west corridor) to the east and Interstate 65 (north-south corridor) to the west. The southern
boundary of the subject’s market is the Henry Watterson Parkway which is a transportation loop in the
Louisville Metropolitan Area. The subject is located in an area of Louisville know as Phoenix Hill.
More specifically, the subject is located on Baxter Avenue, Hull Street and Barret Avenue, near the
corner of Baxter Avenue and Barret Avenue. The subject’s parcel is such that it fronts on all three
streets with addresses on Baxter and Barret Avenues. Baxter and Barret Avenues are main
thoroughfares in Phoenix Hill along with Lexington Road and Bardstown Road which intersects with
Baxter Avenue. The submarket of Phoenix Hill is an old section of Louisville with an exciting past. The
subject’s site once housed the Phoenix Hill Brewery which was a very popular locale in early Louisville
history and dates from around 1865. The area around the brewery developed into a collection of typical
main street retail buildings with second floor apartments or offices as well as supporting industrial sites.
This eclectic history has morphed into today where these varied mix-use buildings have evolved into a
myriad of different uses. These uses include mostly retail, office and apartment. Industrial use in this
area has waned in favor of other locations in the Louisville area. The subject’s property, though only 65
years old has seen its own use change over time. The subject once housed a diesel engine school and
now has warehouse, retail and office space within the improvements.
Just east of the subject property is an older mix of residential housing beyond which is Interstate 64.
Just south and east of the subject property less than .5 miles is the premier cemetery in this area. It is
called Cave Hill Cemetery and its’ northern boundary is southeast of the subject property. Further west
is Beargrass Creek beyond which is the start of the Central Business District (CBD). Baxter Avenue itself
becomes Bardstown Road further south. Just north of the subject property beyond Interstate 71 is the
Ohio River.
This general area has seen some new development and/or restoration over the last 30 years, yet still
has somewhat of an older inner city look and feel to it. The development of the surrounding area dates
back well before 1900. While this area did suffer decline in the past, there has been a movement
towards renewal over the last 30 years. Some of the older buildings have been razed and replaced with
new ones, but many of the original buildings remain in this area, some in restored condition. Overall,
the subject’s neighborhood is considered to be stable with a likelihood of slow, but continued renewal.
As the economy improves, demand should increase in this area.
The Site to Do Business (STDB) web site reports the following demographic information for 2010 within
a 3-mile radius of the subject:
Population: 105,588
Total Households: 50,105
Families: 20,807
Avg. Household Size: 1.95
Owner Occupied Units: 20,923
Renter Occupied Units: 29,182
Median Household Inc: $36,821
Avg. Household Inc: $51,858
Per Capita Income: $25,435
DESCRIPTION OF REAL ESTATE APPRAISED
IDENTIFICATION OF THE SUBJECT:
The subject property is recorded in Deed book 7604 Page 0461. The property is further identified as
Block 068C Lot 0123 with a mailing address of 514 Baxter Avenue & 509 Barret Avenue, Louisville, KY
40204, in the county of Jefferson.
ZONING:
The site is zoned C-M, Commercial Manufacturing. The C-M, Commercial Manufacturing zoning is
intended to allow all uses permitted in this class for commercial/manufacturing uses. Additional details
on this zoning can be found at the website for the Jefferson County Land Development Code.
ASSESSMENT HISTORY:
The property is assessed by the Jefferson County PVA at $238,710 land, $457,300 improvements, for a
total of $696,010. The last assessment is dated 01/01/2007.
TAXES:
The subject property is subject to Jefferson County tax rates of 1.31% per $100 of assessed value. By
state statute, properties in Kentucky are required by law to be assessed, for tax purposes, at 100% of
market value. If the property sold, the assessment would likely be updated; in such cases, the PVA
typically bases the following year's assessment on the sale price. If taxes are calculated based on the
final value concluded in this report of $700,000, the estimated tax burden for the following year would be
$9,198.
REASONABLE EXPOSURE TIME
In the Statement on Appraisal Standards No.6 (SMT-6), Exposure time is defined as follows: "The
estimated length of time the property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a
retrospective estimate based upon an analysis of past events assuming a competitive and open
market."
Exposure time is different for various types of real estate and under various market conditions. It is
noted that the overall concept of reasonable exposure encompasses not only adequate, sufficient and
reasonable time but also adequate, sufficient and reasonable effort. The reasonable exposure period is
a function of price, time and use.
SUBJECT PROPERTY EXPOSURE TIME:
Based on interviews with brokers and others involved with some of the comparable sales indicates
that approximately 9 to 12 months is reasonable exposure time for this type of property at the market
value level estimated in this report. Based on this information, it is our opinion that the estimated
reasonable exposure time for the subject property would have been 9 to 12 months prior to the effective
date of this appraisal.
SITE SUMMARY
Location:The subject is on Baxter Avenue between Barret Avenue and Hull Street.
Gross Site Area: 34,173 SF (0.7845 acres)
Excess Land: None.
Surplus Land: None.
Primary Road Frontage: Baxter Avenue
Secondary Road Frontage: Barret Avenue
Additional Road Frontage: Hull Street
Primary Traffic Counts (24 hrs.):10,827 cars per day in 2010.
Secondary Traffic Counts (24 hrs.):5,785 cars per day in 2009.
Zoning District: C-M, Commercial Manufacturing,
Flood Zone(s): X – The subject is not located in the 100-year flood plain according to flood map number
21111C0042E, dated December 5, 2006.
Parking: There is a paved parking lot in front of 514 Baxter Avenue with approximately 25 lined parking
spaces. The parking lot has some additional space in it, which may allow for additional parking. On the
Barret Avenue side, the parking lot has approximately 8 lined parking spaces. There is street parking on
Hull Street and the surrounding neighborhood. Overall parking appears adequate.
Landscaping: The subject’s site has some landscaped areas which mostly include the left rear of the
site which has no improvements. In this section of the site, there is mostly natural growth with grass,
shrubbery and trees. In addition, there is a grass mowing strip in front of 509 Barret Avenue. The
landscaping is in overall average condition.
Shape and Frontage: The parcel is irregular in shape, but mostly resembles a “T” shape.
Ingress/Egress: There are two curb cuts off Baxter Avenue and one off Barrett Avenue.
Topography and drainage: The subject’s site is not level. At the front of the site on Baxter Avenue, it is
level to the rear of the site. On the north side of the subject’s “T” lot, the elevation drops down to Barret
Avenue. On the south side of the “T” lot, the elevation rises to Hull Street. At the top of Hull Street,
there is a level pad at street level.
The topography of the site is not seen as an impediment to the development of the property. With
the exception of the Hull Street side of the subject’s parcel, the entire site is developed. The elevation
differences on the Hull Street side of the parcel might be developable depending on other factors such
as soils testing, engineering determinations, and final determination of the subterranean bunkers, etc.
During our inspection of the site, we observed no drainage problems and assume that none exist. The
site appears to drain towards the right side or the front of the subject’s site. The front of the site is also
sloped slightly towards the street and to the right allowing excess runoff to drain in that direction.
Soils: A soils analysis for the site has not been provided for the preparation of this appraisal. In the
absence of a soils report, it is a specific assumption that the site has adequate soils to support the
highest and best use.
Man-made subterranean bunkers: The subject property has two unique historic features within the
property lines. The subject’s site is the former Phoenix Hill Brewery which dates back to 1865. The
brewery constructed underground storage vaults for their alcoholic products. These underground
bunkers, constructed of limestone were collapsed in order to build the original improvements in 1947.
The un-collapsed ends of these bunkers are on the subject’s site as it abuts Hull Street. The current
owner excavated the rubble from these two bunkers and exposed an approximately 60 foot length of
remaining bunker. These historic features could add value if deemed safe and if the current
improvements were to be used for some enterprise that could benefit from their existence.
Easements and encroachments: Based on an inspection and review of the subject deed, the property
does not appear to be adversely affected by any easements or encroachments. It is recommended that
the client/reader obtain a current title policy outlining all easements and encroachments on the property,
if any, prior to making a business decision.
Covenants, conditions and restrictions:There are no known covenants, conditions and restrictions
impacting the site that are considered to affect the marketability or highest and best use.
Utilities and services: The site is within the jurisdiction of Jefferson County and is provided the following
municipal services:
-Police
-Fire
-Garbage collection
-Water
-Electricity
-Sanitary Sewer
-Storm Sewer
-Telephone
Adjacent properties:
The adjacent land uses are summarized as follows:
North: Commercial corridor with mixed residential beyond.
Southeast: Commercial corridor with cemetery land beyond.
South: Commercial corridor with mixed residential beyond.
East: Commercial corridor with mixed residential and an interstate corridor beyond.
West: Commercial corridor with mixed residential beyond.
IMPROVEMENTS:
The subject property’s site is improved with a 19,363 SF, 2-story multi-tenant retail/office/warehouse
building. The improvements were built in 1947, though it appears that the front section was probably
built sometime after that. The current owner acquired the property in 1976 and did no additions. It is
used as an owner-occupied property though there is one retail space that is leased and additional office
space that is vacant. Some sections of the property are in overall average condition, while other
sections are in good condition.
The improvements have a poured concrete slab, exposed concrete block wall construction with metal
siding. The warehouse industrial sections have a steel framed superstructure. The roof is slightly
pitched with different sections depending on the ceiling heights. The roof has been renewed within the
last 2-12 years with the exception of one small section. That one remaining section has fiberglass
shingles, while the majority of the roof was renewed with a single-ply material. The windows are wood
and metal framed and the doors are aluminum or steel. There are four bay doors, three in the industrial
warehouse sections and one in the leased retail section.
The warehouse interiors are mostly open with some separation build out to create separate work spaces
within the warehouse sections. The front retail unit was built out of the larger warehouse section. The
retail section on the 1st floor on Barret Avenue was finished with showroom, offices and a garage unit
for repairs. The 2nd floor office section on Barret Avenue is partitioned into office and reception space.
There are six bathrooms in the building. The interior sections appears to have been built out with wood
framed walls with drywall; fluorescent lighting and either bare concrete, commercial grade carpeting,
vinyl and/or tile flooring. The property owner operates a tile business from the premises, so there is a
lot of high quality finished tile work in the different sections of the improvements.
DESCRIPTION OF THE IMPROVEMENTS
Building type:Retail/office/warehouse
Number of stories: 2-story
Year Built: 1947
Occupancy type: 80% owner occupied, 20% tenant occupied
Overall condition: Subject is in overall average to good condition depending on the different sections in
the improvements.
Building size: 19,363 SF
Floor area ratio: 56.66%
Foundation: Concrete slab
Basement: None
Superstructure: Concrete block construction and steel frame.
Exterior walls: Concrete block and metal siding.
Windows and doors:Wood framed and aluminum fixed and non-fixed windows and aluminum and metal
exterior doors.
Roof: The roof is of a gable design but with only a slight pitch. Because of the elevation differences in
different parts of the improvements, the roof is cut up accordingly. The roof has fiberglass shingles on
one small section, while the remaining sections were renewed with a single-ply material.
Ceiling material: Drywall or ceiling tiles
Ceiling height: The building is approximately 16 feet tall at its’ highest point. The warehouse sections
vary in height and range from 14-16 feet tall. The interior ceilings are approximately 8-9 feet tall
depending on what section of the building.
Interior walls: Wood framed interior walls with drywall.
Floor: Concrete slab base with varying flooring finishes including commercial grade carpeting, vinyl
and/or tile flooring.
Lighting: Recessed and open fluorescent lighting.
HVAC: Gas forced air furnace and central air conditioning with one space heater in the warehouse
section.
Utility meters: The building has one set of electrical and gas meters.
Elevators: None.
Sprinklers: None.
Restrooms: There are six restrooms in the property.
Functional utility: The subject is of average design functional as a single or multi-tenant retail space.
The subject is such that even though there are separate spaces for numerous tenants, the building is
accessible throughout the different spaces.
Special features: None.
ENVIRONMENTAL ISSUES: American Appraisers has not observed and is not qualified to detect, the
existence of potentially hazardous material or underground storage tanks which may be present on or
near the site. The existence of hazardous materials or underground storage tanks may affect the value
of the property. The presence of substances such as asbestos, urea formaldehyde foam insulation or
other potentially hazardous materials may affect the value of the property. For this appraisal, American
Appraisers has specifically assumed that the property is not affected by any hazardous materials that
may be present on or near the property.
The subject was built prior to 1978 and as such may contain hazardous building materials such as
asbestos, lead paint or urea formaldehyde foam insulation.
In addition, the subject has two man-made subterranean bunkers on the property. These were
constructed out of limestone before 1900. This appraiser has no expertise in underground bunkers,
their safety concepts or of the engineering of such as it pertains to underground bunkers and the
surrounding soil. The bunkers are currently exposed and accessible.
Unless otherwise stated in this report, the existence of hazardous material, which may or may not be
present on the property, was not observed by the Appraiser.
HIGHEST AND BEST USE ANALYSIS
Highest and best use is defined as follows:
The reasonably probable and legal use of vacant land or an improved property, which is physically
possible, appropriately supported, financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility, physical possibility, financial
feasibility, and maximum profitability .
Highest and best use gives consideration to the possible, physical, feasible, legal and permitted uses
which would provide the highest net return to the owner of the site under current market conditions.
Physically Possible: The physical characteristics of a site can affect the uses to which it can be put.
These characteristics can include size, location, shape, topography, easements, utility availability, and
surrounding property uses.
Legally Permissible: Except for a legally non conforming property, the first step in determining what is
legally permissible is to analyze private restrictions, zoning and building codes, historic district controls,
and environmental regulations.
Financially Feasible: The uses that are physically possible and legally permissible must be analyzed
further to determine those that are likely to produce a positive return greater than the combined income
needed to satisfy operating expenses, financial expenses, and capital amortization. All uses that are
expected to produce a positive return are regarded as financially feasible.
Maximally Productive: Among financially feasible uses, the use that reflects the highest rate of return (or
value) constitutes the highest and best use.
Implied in this definition is that the determination of highest and best use takes into account the
contribution of a specific use to the community and community development goals as well as the
benefits of that use to individual property owners. Hence, in certain situations, the highest and best use
of land may be for parks, greenbelts, preservation, conservation, wildlife habitats, and the like.
An additional implication is that the determination of highest and best use results from the appraiser's
judgment and analytical skills; that is, that the use determined from analysis represents an opinion, not
necessarily a fact to be found. In appraisal practice, the concept of highest and best use represents the
premise upon which value is based.
HIGHEST AND BEST USE OF SUBJECT
Legally Permissible: The subject’s C-M zoning allows for a variety of types of commercial uses. The
existing improvements conform to the prevailing zoning codes for the C-M zoning, surrounding land use
patterns, and are not restricted by any known deed restrictions; therefore, the subject improvements are
legally permissible.
Physically Possible: Currently the property is an improved site that has 34,173 SF (0.7845 acres).
The physical characteristics of the subject’s site are adequate to accommodate improvements, which do
not require a larger land size. The subject is currently improved with a 2-story, 19,363 SF retail, office,
and warehouse building; therefore, the subject improvements are physically possible.
Financially Feasible: The subject is located on Baxter Avenue. There are numerous other
developments in this area and this area is seen as an average location for retail, office and warehouse
development in Jefferson County. Therefore, a use similar to the subject is financially feasible.
Maximally Productive: The improvements currently in place are consistent with the highest and best
use as though vacant, and the value associated with the existing improvements is higher than the value
of the site as though vacant. Therefore, as improved, the current improvements appear to represent
the highest and best use for the subject.
However, during the research process for this appraisal, an alternative scenario was realized and is
explained as follows.
The subject property has a unique parcel in that it fronts three different streets in an area of Louisville
that is experiencing change. The subject property has been offered for sell for over a year and had a
prior listing at $1,200,000. It is now listed for $982,000. According to the listing agent and the owner,
there has been interest, but the layout and functionality of the property is such that prospective buyers
have struggled with their own abilities to visualize the full utility of the improvements and site. This has
resulted in no offers as of the date of this appraisal.
The property has been advertised as both industrial and special purpose. In looking at the subject
critically and given the changing dynamics in the Phoenix Hill area, American Appraisers feels that the
subject is not being marketed correctly. The subject would probably benefit from a change in marketing
strategy from industrial to retail or for possible new development. The subject, if given the right boost of
capital might achieve success as a retail bar/restaurant. It has great open warehouse space with office
space and might command a significantly higher price per SF if leased like other retail establishments
along this eclectic commercial corridor. In addition, the subterranean bunkers, if deemed safe, could be
incorporated into some type of retail plan, thus rendering any establishment at an eclectic advantage.
For example, utilizing the bunkers as an outdoor bar area would create enough “buzz” and could give an
establishment an edge over similar competing properties.
Even the leasing aspect for the subject property has been inadequate. The vacant office space on the
2nd floor has been vacant for 5 years. Even in a bad market, a different marketing strategy and better
pricing could solve this problem. The warehouse space has also been unsuccessful in finding any
tenant at all either for one of the smaller spaces or for the entire warehouse space.
The subject is in a prime location in the Phoenix Hill neighborhood and complete redevelopment is
possible. This would require the coordination of resources, the planning and development approval
process and various other steps to determine the best options for this site. The overall financial
feasibility would need to be determined, but the location, the unique lot and the historic bunkers could
be utilized in a successful bid for redevelopment. This type of in-depth analysis is beyond the scope of
this appraisal.
The subject is currently an underutilized property with strong potential for improvement and a potential
increase in value.
Conclusion:
Based on this analysis, the current highest and best use of the subject property is the existing
improvement as a retail/office/warehouse property. These thoughts are carried through to the valuation
section of the report.
INCOME APPROACH
The Income Approach is the valuation procedure in the appraisal process, which converts the
anticipated future benefits (dollar income and amenities) to be derived from property ownership into a
value estimate. The Income Approach is strongly applicable in appraising income producing properties,
as it is a measure of the extent of what benefits might reasonably be expected. The anticipated future
income and/or property reversion at the end of the projection (or ownership) period are translated to a
present worth value through the capitalization process. The basic principles of real property value
suggest the existence of a predictable relationship between income and value. The objective of the
Income Approach is to measure this relationship by analysis of market data.
The steps involved in the Income Approach process are summarized as follows:
1) Estimate potential gross income.
2) Estimate and deduct a vacancy and collection allowance to derive effective gross income.
3) Estimate and deduct expenses of operation to derive net operating income (net income before
recapture).
4) Estimate remaining economic life or the duration of the pattern of the projected income stream.
5) Select an applicable capitalization method and technique.
6) Develop the appropriate rate or rates.
7) Complete the necessary computations to derive an economic value indication by the Income
Approach.
SUBJECT LEASE HISTORY:
The subject property is an owner-occupied single or multi-user retail/office/warehouse building. The
owner has occupied the premises for approximately 36 years since 1976. The property is owned by an
individual who in turn leases out part of the premises for his own business and leases out unused space
to third parties. The only tenant that is currently installed in the subject property pays $1,804 per
month or $5.84 per SF/year in rent on a modified gross lease for 3,705 SF of space. The tenant is
responsible for some of the utilities. Separate analysis has been done in the income approach to
determine the appropriate price per SF for the un-leased space and the overall value in the income
approach. The NNN value of the subject’s existing lease has been calculated to be $4.96 per SF/year.
This property should be treated as a NNN lease where all costs associated with the property would be
paid for by the tenant. The income approach will be done on that basis.
COMPARABLE LEASE DATA AND SELECTION OF SUBJECT LEASE RATE
The subject property is located in an area with a wide variety of property types, ages, conditions and
utilities. The subject’s general location is tucked in between the Central Business District, Interstates 71
and 64 and Cave Hill Cemetery, the subject property’s immediate area is difficult to define in terms of
lease value. The subject’s location near a corner lot enjoys good traffic flow and is surrounded by
mostly older residential and commercial properties with some newer development scattered throughout.
The subject’s specific location is at the beginning (northern boundary) of the Bardstown Road
commercial corridor. This section of Bardstown Road known as the Highlands pretty much ends at
Phoenix Hill Tavern located about one block away from the subject property. Therefore, the subject is
just outside of the most prized section of the Bardstown Road corridor. However, a large development
at the subject’s location would extend the desirable corridor to include the subject.
That said, the subject is currently beyond the most desired area and has been difficult to lease. I
believe that if we were in a healthy expanding economy, the building would sell or lease to a single-user
in the entertainment industry such as a large restaurant or bar. Given the poor rental history of the
subject, the lease rates currently being offered are used as a ceiling for the lease rates even though
there is evidence that would suggest a market lease rate should be higher.
Newer properties in this area do tend to lease for a higher amount than older properties. The subject
property would be considered an older property within this neighborhood.
Because the subject is a unique property with retail, office and industrial space, it is difficult to determine
lease rates for a combination building such as the subject with varying utility types. Therefore, it is
necessary to separate the utility factors and determine appropriate lease rates for each of the different
utility types. Two comparable leases for each property type (retail, industrial & office) were selected.
The two retail lease comps are $4.96 and $5.74 per SF/year as NNN leases. The two industrial lease
comps are $3.15 and $3.57 per SF/year as NNN leases. The two office lease comps are $7.89 and
$4.00 per SF/year as NNN leases. All six of these leases are in the subject’s general neighborhood.
Given the ultimate unknown utility for the subject’s leases, it could be realized that one entity could lease
the entire property for an amount different from what the market demonstrates for the individual
sections. Often warehouse space requires some office space and retail space often requires
warehouse or even office space depending on the type of business.
In addition, it is noted that the subject is currently listed for $7.00 per SF/year for the office section and
has an expired listing for $4.32 per SF/year for the industrial section and neither has leased at those
prices. Given the comparable office leases and the failed attempts at $7.00 per SF/year, a price for the
office at $6.00 per SF/year will be used in the income pro-forma. A price per SF for the warehouse
space of $4.00 per SF/year will be used in the income pro-forma as the $4.32 per SF/year did not result
in a tenant. The retail space will use the current lease amount of $4.96 per SF/year on a NNN basis.
The selected lease amounts do not include any tenant improvements that may be added to the lease.
The differential between NNN leases and gross leases was calculated to be approximately 15% and that
amount was used for the lease comparables. The 15% was determined by the difference in the subject
property’s income as a NNN lease and as a gross lease.
VACANCY RATE:
The subject property is a mixture of retail, office and industrial usage, but would be best suited as a
single-tenant retail/office/warehouse property. However, it can be and is currently divided into separate
sections. Only one section is currently leased, while the owner occupies the remaining space. A typical
vacancy rate for a mixed use property in this area ranges from approximately 5% to 25% depending on
location, condition, price per SF and size. Smaller spaces tend to lease more easily than larger
spaces. Multi-tenant spaces have the advantage of leasing out different spaces to different users. The
subject property has three such distinct uses, but has suffered from high vacancy which is due to a
variety of issues. These issues include configuration, access, price and condition. While it is ideal for a
single-user, finding the one single user has been difficult. It is estimated that with proper marketing it
would take from 10-18 months to locate a suitable long-term tenant for the subject property.
Given that the property would probably lease for a significant period of time, 3-5 years, a vacancy rate
from 15% to 25% over a 4-6 year period would not be unexpected. Given the realities in this current
market and the history with this particular property, we will conclude a vacancy rate at 20% including
frictional vacancy and credit loss. This would allow time for the property to mature in the open market in
order to attract a tenant that can fully utilize the subject property to the fullest extent.
EXPENSES:
The subject would most likely lease to a single tenant on a NNN basis where all expenses are passed
through to the tenant. The subject’s lease will be analyzed in totality on a NNN lease, where all taxes,
insurance, and maintenance will be paid by the tenant. Real estate taxes are based on the value
conclusion of the appraisal report. A management fee of 5% is used as a variable expense. A leasing
commission of 3% is also used and is shown in the income pro-forma.
RESERVES:
Market participants generally quote overall capitalization rates for properties of similar size, quality, and
value range without the inclusion of reserves. Reserves can be included in the selection of an overall
capitalization rate. In this example, reserves are set aside and included in the income pro-forma.
Reserves include items considered capital improvements such as the roof, HVAC equipment and the
asphalt parking lot. The HVAC and asphalt parking lot costs were estimated and the roof costs were
given by the owner as most of the roof has been replaced in the recent past. These costs are
illustrated in the table below:
OVERALL CAPITALIZATION RATE SELECTION
The overall capitalization rate is based on two sources of data. The primary source of our overall rate is
based on extracting these rates from market sales. This method is known as market extraction.
The second method is the mortgage equity analysis also known as a built up rate. This method uses
known mortgage requirements and combines them with investor equity requirements to arrive at an
overall capitalization rate.
MARKET EXTRACTION
The chart below was an attempt to estimate a capitalization rate from the actual comparable sales used
in the sales comparison approach. The rents are extracted from the comparable sale or are estimated
from the market. A NNN lease is assumed. A 20% vacancy rate was taken out and reserve rates were
calculated using a similar technique to what was used in estimating the reserves for the subject
property. That reserve rate came to $.215 per SF and was used in this analysis.
While this analysis is helpful as a guideline in choosing an appropriate capitalization rate, a lack of
complete data hinders a more comprehensive and foolproof outcome.
MORTGAGE EQUITY ANALYSIS
The built up method essentially constructs an overall capitalization rate RO based on requirements
typical in the market such as typical mortgage interest, loan to value, risk etc.
Expressed algebraically,
RO = (RM * M) + (RE * {1-M})
Given:
RO = Overall Capitalization Rate
RM = Mortgage Constant
RE = Rate to the equity position
M = Loan to value ratio
The band of investment technique has been utilized as a crosscheck to the foregoing technique. The
overall rate implied by the band of investment technique is 9.02%. The analysis is shown in the
following table to the left.
CONCLUSION OF OVERALL RATE
The market extracted sales indicate a capitalization rate between 8.26% and 10.02%, with a median of
8.69% and a central tendency (mean) of 8.94%. The band of investment is used as a check to the
market extraction technique and implies a rate of 9.02%. Both methods reflect a similar capitalization
rate (rounded), therefore, a rate similar to these two will be used in the income pro-forma. The rate used
in the income pro-forma is 9.00% and is considered to be well supported.
SALES COMPARISON APPROACH
The Sales Comparison approach is essential to almost every appraisal of the value of real property.
The application of this approach produces an estimate of value of a property by comparing it with similar
properties of the same type and class which have been sold recently or are currently offered for sale in
the same or competing areas. The sales prices of properties judged to be comparable tend to set the
range in which the value of the subject property will fall. Further consideration of the comparative data
will indicate to the appraiser a figure representing the value of the subject; that is, the probable price at
which it could be sold by a willing seller to a willing buyer as of the date of the appraisal. The data
involved in the application of this process concerns comparable properties as well as the subject
property, and will vary with the type of property.
In appraisal practice, the sales comparison approach is a set of procedures in which a value indication
is derived by comparing the property being appraised to similar properties that have been sold recently,
then applying appropriate units of comparison and making adjustments to the sale prices of the
comparables based on the elements of comparison. The sales comparison approach may be used to
value improved properties, vacant land, or land being considered as though vacant: it is the most
common and preferred method of land valuation when adequate supplies of comparable sales are
available.
QUALITY AND QUANTITY OF DATA:
Numerous comparable sales were considered in the sales comparison approach and five sales were
utilized in the analysis.
For this particular property, both the income approach and the sales comparison approach are
suitable. In an income generating property, adjustments for location, condition, age and other factors
are pre-determined by the rents paid and the income generated. Because both approaches are utilized
with income being a key factor, no specific adjustments were made for these categories.
Instead, a rent differential adjustment was calculated to illustrate the income variables in the different
comparables. The rent differential allows for a property to be analyzed strictly on its income producing
abilities. The net operating income (Io) is divided by the square footage of the property to come up with
a price per SF based on the Io. The difference between the price per SF for the subject’s Io and each
comparable is calculated. This difference is the price per SF rent differential.
This in turn is multiplied by the square footage of the comparable and then capitalized at the Ro rate
established for the comparable which gives us a lump sum adjustment. This amount is either positive or
negative and accounts for the actual rent differential adjustment.
Due to the lack of actual rental data, rental amounts for some or all of Comparable Sales 2 – 5 in the
rent differential were estimated from the market.
Comparable 1 is the sale of a large industrial/office building very similar to the subject property. This
property has two buildings, 2306 and 2320 Frankfort Avenue. This property has 4,000 SF of
office/showroom space with the remainder being warehouse space. The blended rate of rent of this
property is $5.38 per SF/year. Both buildings were leased as of the date of sale.
Comparable 2 was the sale of a two-story mixed use property on Bardstown Road. This property was
vacant as of the date of sale and the rental amount for the rent differential was estimated. The first
floor is suitable for retail or office and the 2nd floor is suitable for office or apartment conversion. A call
to the listing agent was not returned.
Comparable 3 was the sale of a retail/office property with three buildings. All three buildings are on one
parcel. This property is on a one-way street. It is in excellent condition. Per the listing agent, Tim
Stephens, the property was fully leased as of the date of sale, but the buyer eventually occupied the
entire property as the leases expired.
Comparable 4 is the sale of a mixed use property on Bardstown Road. The property has a retail space
in the front, an apartment in the middle section and warehouse space in the rear. There is some
parking in the rear of the site. The buyers later spent approximately $100,000 on renovations after the
date of sale. The retail and apartment spaces were later leased to a family member and friend, but
appear to have been at market rates. This property was appraised earlier this year by American
Appraisers.
Comparable 5 is the sale of a industrial building with office space on Baxter Avenue. The property was
vacant as of the date of sale and was purchased for use by an owner-occupant. The sale was verified
with the buyer. The property, built in 2005 was in good condition as of the date of sale.
The adjusted unit values of the comparable sales are as follows:
Comparable 1 $38.43 per SF
Comparable 2 $40.10
Comparable 3 $32.91 Comparable 4 $35.92 Comparable 5
$35.67
The above comparable sales indicate an adjusted value ranging from $32.91 per SF to $40.10 per SF
for the subject property. This range is very tight and is reflective of the market in this section of
Louisville. The adjusted comparables have a median of $35.92 and a central tendency of $36.61 per
square foot of building improvements.
The range of values is quite small and well supported. A value between the median and the mean is
justified, so a price of $36.00 per SF is chosen to best represent the subject property.
19,363 SF @ $36.00 per SF = $697,068
VALUE BY SALES COMPARISON APPROACH $700,000
ROUNDED
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Page updated January 10, 2012