Mixed-Use Building Appraisal
Mixed-use properties are properties that have any combination of two or more uses. They typically consist of some combination of office, retail, and multi-family, or apartment, uses. The mixed-use aspect of these properties introduces several complications to their valuation that are not typically necessary to consider in single-use property valuations.
First, each of these property types has different types of leases, and apartment units can be sold as condominium units. This results in different types of cash flows. Apartment leases typically have a one-year term with a fixed rental throughout the term. Office and retail leases typically have longer terms. The rents for these property types typically increase over the term of the lease but the way in which they increase is different. Office leases often adjust based on a consumer or producer price index, a CPI. or PPI. Office leases also might step up at various scheduled times over the course of the lease.
Retail leases might use either of these methods but they might also be based on a percentage of sales. These are known as percentage leases. A percentage lease will have a fixed rent that represents a percentage of gross sales. This type of lease is explained in more detail in our retail property video. This allows the lessor, typically the property owner, to participate in the success of the retail tenants.
The different uses also likely have different overall capitalization and discount rates. This means that either the different projected cash flows must be combined and the total net income must be capitalized using a blended overall rate with the direct capitalization rate being a combination of two or more capitalization rates, based the percentage contribution of the net income from each use to the total net income, or the projected net income from each use must be discounted separately and the totals added together.
A second consideration is the interaction between the different property uses. Apartment unit and office tenants might serve as customers for retail stores, apartment unit tenants might work in office units, and a retail or office component might be a factor that an apartment unit tenant or buyer takes into consideration in renting or buying a unit.
These are the more-or-less captive tenants. Assuming a retail store or office space on the site offers quality service in the category that it serves, any residential tenants are likely to frequent it and, if a retailer on the site with office space offers quality service, users of the office space are likely to frequent it during and immediately before and after office hours. This will tend to supplement income from off-site sources. If the mix consists of only office and retail uses, the occupancy for one or both uses might be higher.
Finally, there are additional complications in selecting and adjusting comparable sales for a mixed-use property. It is unlikely that there are other mixed-use properties with the same composition of uses in the same market. The solution is to adjust sales in the same market to account for the different percentage of uses or to adjust sales in other markets for the differences in the markets or both.