Citywide Commercial Appraisers

Commercial real estate appraisers

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Retail & Shopping Center Appraisal

Not long ago, the appraisal of retail property involved far more speculation than it does today. In those days, the information on the shoppers in a neighborhood consisted mostly of traffic counts and demographic data such as population, age, and gender.

These days, there is a record of practically everything that we do. Every purchase with a credit or debit card is tracked and available on a monthly statement. Our location is tracked whenever we have a cell phone with us. Emails and interactions on social media are all part of our permanent record.

All of this might seem a bit creepy to some, but the great advantage is that analysts of the potential for retail sales can now serve customers with both broader and deeper levels of service. Now, in addition to information on demographics, they also have rich information on lifestyles. Retailers can use this information to precisely target the customers who will be most interested in their products.

The result is far more certainty regarding the prospective sales for both free-standing retail stores and for shopping centers. This results in more certainty regarding the value of the real estate in which these operations are housed. Much of this derives from the unique character of many retail leases.

Retail leases typically have a term of several years. They can be structured with various types of escalations, as office leases are. The most popular type of retail lease, however, among both landlords and tenants, is the percentage lease.

Percentage leases have a base rent that represents a certain percentage of a certain level of gross sales. When the retail store exceeds this gross sales amount, additional rent kicks in such a way that the landlord continues to receive the same percentage of gross sales. Percentage leases benefit landlords because they have an opportunity to participate in the growing prosperity of the store. They benefit tenants because they provide landlords with an incentive to make improvements to the property that will increase gross sales. They also ensure that, once the retailers surpass the gross sales upon which the base rent was calculated, they will be able to afford to pay the rent out of their sales revenues.

Retail tenants often pay a portion of the expenses of operating and maintaining retail real estate in the form of common area maintenance, or CAM, charges. The properties are best served if as many utilities as possible are billed directly to the individual tenants because this gives them an incentive to conserve their use, but expenses such as property insurance, property taxes, management, and reserves for replacements cover the entire property and cannot be billed directly. For multi-tenant properties, these expenses are typically pro-rated among the tenants.

CAM charges will not cover all the expenses, and the landlord will inevitably have to pay some of them. Furthermore, there will be periodic vacancies as tenants’ leases expire. These are deducted from the gross income to calculate net operating income. This net operating income can then be capitalized to arrive at a professional opinion of value for the property.

Shopping centers have certain unique advantages over free-standing stores. Chief among these is the ability of some stores to draw customers who might then be interested in shopping in other stores in the same shopping center. Stores that have the greatest potential for accomplishing this are known as anchor stores.

Anchor stores can be department stores, supermarkets, or big-box stores. These stores are destinations for many shoppers, and stores that offer complimentary goods often benefit from being near them. It is common for landlords to offer these stores somewhat lower rents because of the benefits that they bring to the shopping center.

The parking lot size and layout are also major considerations in the analysis of shopping centers. Suburban and rural customers need a place to park, even at the busiest times, and they prefer to park as close as possible to the entrance of the store they will be patronizing A very irregular parking area, or one with limited spaces near store entrances, can be detrimental to retail users.

The appraisal and analysis of retail properties has evolved quickly in recent years, and it continues to change.

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