Commercial Case Study

RETAIL CRU’s, SECOND OPINION

One of the “big” banks requested a second opinion on a valuation completed as trying to finance a buy-out by one partner of another but lacked confidence in the valuation produced.

The valuation, completed by an appraiser not approved by Lender, was an update of a valuation completed for the partner being bought out. Lender questioned the vacancy rate, the lease rate, the going-in capitalization rate and value by Direct Capitalization, as well as the Direct Comparison Approach conclusions. Ultimately, Lender rejected the valuation. Property consisted of individually titled CRU’s located in a newer neighborhood shopping centre with good exposure, above average household income and limited direct competition.

Initial consultation with Lender about retail vacancy and capitalization rates. Discussion with Client (Borrower) about property. Inspection and valuation of the property. Follow-up discussions with Lender and Borrower.

Vacancy and capitalization rates both concluded lower than other valuation, yielding a higher value by Income Approach. Direct Comparison also higher given project’s age, quality of interior build-out and general market location. Borrower secured a higher dollar loan amount based on higher value, while Lender “scooped” business from another Lender where the mortgage was held. Difference in unit sizes between lease and condominium plan identified, which raised questions about present and future cash flow issues.

Improved property valuation “as is”: we reviewed the leases and discussed each tenant; completed Argus cash flow modeling; and, undertook quantitative adjustments linked to qualitative analysis for the market rents and the comparable listings and sales. We did not include a Cost Approach.

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