BY CHUCK WEST, CCIM AUTHOR AND EDITOR
Forever West MARCH 2021 RAISE, HOLD, OR FOLD? ARE YOU PLAYING POKER WITH YOUR INVESTMENT? Cheyenne Wyoming has an overall apartment vacancy rate of below 2%. A 5% vacancy rate is considered a normalized market. Calls to my office for residential rentals are a daily occurrence and we are not in the property management business. Many owners in markets such as this prefer to keep rents stable in order to avoid tenant turnover and the costs to bring a unit back to a rentable condition which may better appeal to a new renter. When an owner enjoys a positive cash flow from a fully occupied building the tendency is to not increase rents when such an increase can easily be absorbed in our marketplace despite the inevitable downtime for unit fixup, advertising, tenant interviews, credit checks and the like. When owners of apartment buildings attempt to refinance or sell they can pay a big price for not raising rents to market rates. Appraisers will tend to use a minimum 5% vacancy & credit loss factor on projecting your Net Operating Income (NOI) even if your building is 100% occupied. Also you can argue that your rent should be higher but an appraiser and buyer will discount this and look at what you are actually getting pursuant to your lease documents. This will be worse if you have agreed to a lease for a term of years (see Westline April 2013) that locks the landlord into a below market rate for some time or capital improvements are needed. Let’s use a hypothetical owner of a four-plex apartment where the market rate for each unit is $1000/mo. but the owner is charging an average of $800/mo. Assume that the cap rate (see Westline Oct 2015) for this property is 6.5% and expenses including the 5% vacancy factor are 35% of gross income. The owner is collecting a gross annual income of $38,400 per year indicating an NOI of $24960. At a 6.5% cap rate this would indicate a value of $384,000. Applying a market rental rate would generate a gross annual income of $48,000 and an NOI of $31200 indicating a value of $480,000. The bottom line is that the failure of this owner to raise rents to market could cost him $96,000 on a resale or a refinance. If an owner attempts to sell this property without the aid of a commercial real estate broker no one is likely to point this out. I have seen many owners take an unknown haircut by having real estate agents who predominantly handle residential property transactions represent them for commercial and income property sales. (see Westline Sept 2019).
follow me on twitter @cwestucla APPRAISALS AND THE DODD FRANK ACT (DFA)
LEGAL CORNER
The federal law cited above has been in the news recently cited as necessity by some to keep a 2008 financial meltdown from happening again while small banks say that it imposes excessive burdensome regulations on them. It however has some other provisions such as requiring creditors to obtain a written appraisal of the property before extending credit. The appraiser must be certified or licensed in the state where the property is located and each appraisal must comply with the Uniform Standards of Professionals Appraisal Practice (USPA) and Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The DFA also allows creditors to use an Automated Valuation Model (AVM) to estimate collateral value. Broker Price Opinions (BPOs) may not be used as the primary basis to determine the value of a homeowner’s principle dwelling and that the AVM is not considered a BPO. In Wyoming a BPO by a real estate licensee must include the statement “This is an opinion of price and is not a certified appraisal of the market value of the property. If such an appraisal is desired, the service of a certified appraiser must be obtained.”-Wyo 33-28-125.
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190 S. COLLEGE DRIVE| CHEYENNE, WY 4500sf drive through space heated w restroom $8.50/sf/yr. NN lease min 1 year
As explained in prior article (Westline reprints available on request) the Cap Rate has a deficiency in that it only measures value at a point in time and that value does not take into account property appreciation or depreciation, tax analysis, capital improvements, age, etc. That is why the IRR is a better tool. However, the impact of not raising rents is still substantial. Chuck West of #1 Properties was awarded the Certified Commercial Investment Member (CCIM) designation #897 in 1978 by the CCIM Institute, one of the leading commercial real estate associations in the world. More than 15,000 commercial real estate professionals have earned the CCIM designation requiring a rigorous combination of coursework and experience since the program was founded in 1969. Chuck is a licensed real estate attorney in CA since 1983 and broker in CA and WY, and has been involved in commercial real estate for over 30 years in private practice, as a corporate executive in charge of 10 million square feet of commercial properties on a national basis and as Director of Real Estate for two large counties handling 14 Million square feet of leased space and 50 million square feet of government owned space.
#1 Properties has closed 2,392 sales in 2020 YTD with a total volume of $775,138,989
03.1.21
Wyoming Employment unemployment fell in WY to 4.8% in December 2020 down from 9.6%. This compares to a national unemployment rate of 6.7%. -Wyoming Department of Workforce Services “Depend on the rabbit’s foot if you will but remember it did not work for the rabbit.” -R.E.Shay
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