Help with value of gas station property - Posted by Jolene

import · August 22, 2005, 8:09am

Posted by Don Dion on August 23, 2005 at 15:38:54:

Good luck in your search.
Now you know where he is getting his $16k for value its in the raw land value but it’s not the value of your property.
Your property value is based on your income from the property and the local cap rate. Which as you can see from my prior posting much higher then the 16k he is showing.
The other thing you will want to do before extending the lease again is do a market rent survey for similar land lease commercial property in the area. These are often gas stations, conveince stores, walgreens ect. The real estate agent or property manager will be your best source for this information and or the county recorders office if you know the address or pin numbers and if the leases are recorded - often they are not since they are not a property transfer.

import · August 22, 2005, 8:09am

Posted by Jolene on August 22, 2005 at 08:09:59:

My grandmother owned part of the land a gas station sits on, she didn’t own the entire parcel just part of it and the station itself owns the rest of the parcel and pays her monthly rent. She recently passed away and the station as well as the rest of the estate was left to my brother and I. I find myself negotiating with my brother to see who will buy this property from the estate. The lawyers have established we will both bid our high price for the property in a sealed bid, high bid takes it, which seems fair to me. My question is…what is it worth?

The part my brother and I own was appraised at 16k. The monthly rent paid to us on the property is $400. It has $960 a year in property taxes. The property has a a brand new 5 year lease with the oil company. The oil company is quite large so there is no chance they would default or go out of business.

Help

Jolene

import · August 22, 2005, 1:33pm

Re: Help with value of gas station property - Posted by ray@lcorn

Posted by ray@lcorn on August 22, 2005 at 13:33:31:

Jolene,

In addition to the question Don asked below in re the property taxes, let me ask a few more before pegging a value range.

Are there one or more renewal options in the lease?

If so, does the rent increase with the renewal(s)?

Is the station a modern facility or recently upgraded?

Does the station do a lot of business?

Is this in a small town, big city or in between?

The answers are significant factors in estimating the value.

ray

import · August 22, 2005, 12:35pm

Re: Help with value of gas station property - Posted by Don Dion

Posted by Don Dion on August 22, 2005 at 12:35:31:

Are the taxes paid by you or is the lease a NNN which reimburses you for the taxes?

import · August 22, 2005, 1:50pm

Re: Help with value of gas station property - Posted by Jolene

Posted by Jolene on August 22, 2005 at 13:50:45:

Ray,

There is an available 5 year extesnion and the rent would increase by the consumer price index or inflation…don’t remember exactly, sorry.

Station is pretty modern and has been remodeled in the past. It has been in it’s current location for 20 years or so. The station does a TON of business. It is located on the main street of town and is the only station in the immediate area. Small city, say 20k people.

Jolene

import · August 22, 2005, 1:28pm

Re: Help with value of gas station property - Posted by Jolene

Posted by Jolene on August 22, 2005 at 13:28:48:

Don,

I’m not sure what NNN means? Far as I know we pay the taxes on the property we actually own ourselves.

Jolene

import · August 22, 2005, 8:05pm

Re: Help with value of gas station property - Posted by ray@lcorn

Posted by ray@lcorn on August 22, 2005 at 20:05:38:

Jolene,

Ok, what you’ve got is a ground lease from a major oil company for a station in a small town that produces enough revenue to be a good candidate for lease renewal. The increase isn’t noteworthy, but the property has an income stream with a long enough duration to be considered by outside buyers.

I’m assuming the lease is signed by the major oil company rather than a smaller subsidiary.

Generally, ground leases signed by major corporations trade in a range of 6% to 7% yield on the purchase price, also known as a cap rate. The lower the rate, the higher the value, and vice versa.

But there are a couple of wrinkles here that would put this property at the high end of that range, thus lowering the value.

First, the income is very low, so the universe of buyers will be limited to local investors.

Second, if the owner must pay the property taxes (as you indicated below), without the tenant’s reimbursement, then that further lowers the income.

$4,800 - $960 = $3,840

One way of determining the value is based solely on the income stream, using the cap rate as the yield available to the investor. Hence, if the investor is willing to settle for a 7% yield on the investment and were paying all cash, the value would be about $55,000. ($3,840 / 7% = $54,857)

However, given the small size of the deal and the likely buyers being local investors, in an open and well-attended auction they would probably bid somewhere around a 10% to 15% yield ($38,400 @ 10%; $25,600 @ 15%).

For a range of value then, you’ve got the assessed value of $16T up to a max of $38T.

There several additional factors that could influence the value above that high end of the range, but probably not below the low end.

I should have also asked the size (acreage) of the property and whether the station’s building or other structures are on the property or just adjacent. That speaks to residual value after the lease expires. Some investors may use that to increase their overall return. If the property is well-located and in the direction of area growth patterns, then the long-term residual value could be significant.

And, if you really want to split hairs, it could make a difference if the lease can be subordinated to a loan. By leveraging their funds with a loan an investor can boost the return, and hence be able to pay more.

Let me ask this… if you were to be successful in purchasing the property, what do you intend to do, keep it or re-sell it?

ray

import · August 22, 2005, 3:36pm

Re: Help with value of gas station property - Posted by Don Dion

Posted by Don Dion on August 22, 2005 at 15:36:09:

NNN means tripple net income the company leasing the property pays all expenses and the taxes. Using the full income div by appraised value that is only about a 4% cap rate. Before lease renewal you might want to do a market survey of commercial land lease rates in your area and change the rental based on that cap rate.

import · August 22, 2005, 9:03pm

Re: Help with value of gas station property - Posted by Jolene

Posted by Jolene on August 22, 2005 at 21:03:48:

Ray,

Thank you for your comments, it is very helpful.

Part of the problem is a hostile family situation between my brother and I. Another problem is I am in Florida and my brother who is the executor is in OR and the property is in PA. His initial buy out offer on the property was 6k so as you can see there really is no good faith.

I have not been to the property since I was young. The property itself is fairly small, maybe .20 of an acre and is a corner lot. The part of the property we own is not the building but is where the underground tanks are locatd, part of the parking lot and one of the driveways (there are 2). They are required to carry insurance and we have no liability with the tanks.

Far as our intentions with the property we figured we would keep it if we win the bid.

Jolene

import · August 22, 2005, 6:06pm

Re: Help with value of gas station property - Posted by Commercial Investor

Posted by Commercial Investor on August 22, 2005 at 18:06:40:

Wouldn’t the cap rate be 24% since NOI is $3840 ($400 x 12 months = $4800 - $960 taxes = $3840). The value of the property is $16,000 so the cap rate would be 24%.

import · August 23, 2005, 12:04pm

Re: Help with value of gas station property - Posted by Jolene

Posted by Jolene on August 23, 2005 at 12:04:28:

Ray,

I made two mistakes due to not having the papers in front of me. The taxes are $1,218.00 per year not $960 as I stated. The term of the lease is 5 years and were in just the first year of that new lease and there are 2 5 year extensions if the lesse wants them.

I posted the entire property appraisal report in my reply to Don if your interested.

Jolene

import · August 22, 2005, 7:05pm

Re: Help with value of gas station property - Posted by Don Dion

Posted by Don Dion on August 22, 2005 at 19:05:43:

Sorry for the typo in my earlier post which showed 4% should have shown the 24%. Guess I typed to fast and missed the 2. I have inserted a more detailed answer for your review.

import · August 22, 2005, 6:58pm

Re: Help with value of gas station property - Posted by Don Dion

Posted by Don Dion on August 22, 2005 at 18:58:35:

Yes your right the cap rate based on his appraisal of $16,000 for the property would be a cap rate of 24%. Which seems way way to high for an un-liquid investment of this type. This is why I was questioning the value at $16,000 for the property based on the current income. A more reasonable cap rate of say 8% would bring a value of $48,000 or 6% would bring a value of $64,000. The lower the cap rate the lower the overall risk to an investor. With this deal you have a gas station with stable income that has been a fixture in the area for years. You have little or no risk and little or no expense, its not unusual for investments with so little risk to have very low cap rates in the 4% to 6% range.

This is evedent in the multifamily area where properties have little or no vacancy’s they are going off at 6.5% to 8% cap rates which have some investors wondering is it worth paying so much for a building with that kind of return?

This is the reason I was pointing out that A: The rents seem very very low for this and since the cap rate did not make any scense to me I would question the value also. Maybe order your own appraisal to be completed. Might cost some $$ out of your pocket now but at least you will feel better about the transaction in the long run. Also the appraisal will help you with the next lease if your the one purchasing the property.

A quick check on the value can be done for you by any realtor. Have them run a report that shows recent sales of commercial property with main road access and corner lots if possible. Divide the sales price by sq ft of the land and then you will have a price per sq ft avg this price over say 6 to 8 properties and then take the avg price paid per sq ft times the number of sq ft you own to get a rough value of your property. Hope this helps.

import · August 23, 2005, 6:05pm

Re: Help with value of gas station property - Posted by ray@lcorn

Posted by ray@lcorn on August 23, 2005 at 18:05:01:

Jolene,

The extra tax knocks the top range of value down to say $35T, and if you want a detailed explanation of the methodolgy used by the appraiser, see this article: http://www.creonline.com/articles/art-216.html

Don has given you the process an appraiser would use to set a value, should you be interested.

But I suspect this is more a tactical issue than a technical one. You can invest a bunch of time, money, and effort arguing with your brother about the value for reasons that have nothing to do with the property, or…

If you’re interested in a quick and fair settlement, sell it at auction and close thirty days later. That sets the value quickly and with certainty. Split the proceeds and be done with it. If you or your brother really wants to own it, then bid it in at the auction.

In reality, it’s a very small deal with no real upside. Realize that emotions and investments always make a bad mix.

My advice is to take the money and invest it in something that doesn’t carry an emotional cost in addition to the financial one.

ray

import · August 23, 2005, 12:00pm

Re: Help with value of gas station property - Posted by Jolene

Posted by Jolene on August 23, 2005 at 12:00:11:

Don,

Thank you for your comments and suggestions. I did as you suggested and contacted a realtor in the area and the best he could tell me was 30k+ for value. It made me wonder if the realtor says 30k+ how the professional appraiser marked the value at 16k?

I should have had the figures in front of me when I posted and I was a bit off, my apologies. I was off on the property taxes, they are $1,218.00 yearly.

The cap rate of the appraiser was 21.25% and here is how he got there, will just put the appraisal down in whole as it might as well be German to me

The band of investment is a method for estimating Capitalization Rate. It involves a mortgage Equity Relationship. Financing terms vary from commercial lending. Most local lending institutions require 20% - 30% down payment for this type of property and finance it for 15 years. An estimated fixed rate is 7.5%.

Mortgage - 80%

Equity - 20%

Mortgage Constant at 7.5% (5 years) =.2404554 (from table)

Equity Rate - 10%

Capitalization = (mort amt. x mort const) + (equity amt. x equity rate)

=(.80 x .2404554) + (.20x.10)

=(.1923643) + (.02)

=.2123 (rounded 21.25%)

The estimated overall Capitalization rate is based on the band of investment theory is approximately 21.25%

The estimated equity rate is based on the assumption that the less return an investor expects on his equity investment. The estimated capitalization rate is 1.5%. The estimated values by the income approach to value are $16,856.47 (rounded to $16,900).

Value is based on 5 year term considering the lease will be renewed for 2 more terms.

Taxes - $1,218.00 per year considered. No liability insurance or other cost and expenses per client.

Income approach was considered in the estimation of value ($16,000)

The sales comparison approachwas presented to show that there is a market for these types of properties. The market activity is limited due to few real estate transfers for this type of building in the County and limited buyers in the area. Even though sales have been few during the past few years, there still is some data available to estimate market value. The estimated value by the way of sales comparison approach is $13,750.

In my opinion, the market value of the subject property is $16,000.

Any of that make sense?

Jolene

import · August 23, 2005, 2:53pm

Re: Help with value of gas station property - Posted by Don Dion

Posted by Don Dion on August 23, 2005 at 14:53:21:

I would find another appraiser if I were you.

Ask the realtor to run sold comps for commercial vacant land for you. Take the sq ft of the lots sold and divide that into the selling price. This will give you a price per sq ft. do this with 5 or more properties and it will give you an avg. Take the avg times the number of sq ft you own an it will have you very close to the value. This wont work with large plots of land but your comparing a gas station size property with anything that is 1 to 2 acres total.

As far as the CAP Rate goes it’s right out of the appraisal book from the pre-license classes I took. It’s refered to by appraisers and realtors as IRV, using IRV you can run the problem three directions to get Value - Rate or Income here are the formula’s:

For Value : Income / Rate = Value
For Rate : Income / Value = Rate
For Income: Value x Rate = Income

Cap Rate:
Estimate the price a typical investor would pay for the income produced by this particular type and class of property. This is done by estimating the rate of return (or yeild) that an investor will demand for the investment of capital in this type of property. This rate of return is called the capitalization (or cap) rate and is determined by comparing the relationship of net operating income to the sales price of similar properties that have sold in a current market.
Example: a compararble property that is producing an annual net income of $15,000 is sold for $187,500. The capitalization rate is $15,000 divided by $187,500 or 8%. If other comparable properties sold at prices that yielded substantially the same rate,it maybe concluded that the 8% is the rate that the appraiser should apply to the subject property.

You might want to bounce this one off of Ray also but any property that sells with a cap rate of 24% or 21.4% how ever your doing it is a vary vary high risk property that is selling at such a cap rate because no normal investor would touch it for less.

This does not seem to be the case here you have a vary stable gas station which pays monthly and has for years. While the investment is not the most liquid it’s still a trouble free investment with little or no mgt needed and should be a low cap rate in the 6 % to 8% range, which I think you will find once the realtor runs the sold comps for you and you do the spreadsheet on the comps yourself.

I think you still need to read your lease with the gas station to see if it’s a NNN if it is then the gas station pays for the taxes.

Here is a quick look at the estimated value (note you will have to run the calc’s yourself once you have your true local market cap rate on vacant land)

@6% based on NNN = $80,000
@6% based on NOI = $59,700
@8% based on NNN = $60,000
@8% based on NOI = $44,775

Hope this helps.

import · August 23, 2005, 3:22pm

Re: Help with value of gas station property - Posted by Jolene

Posted by Jolene on August 23, 2005 at 15:22:52:

Don,

Thank you once again. I have been investigating this all day

I was surprised to find out the independent appraiser who appraised the property use to own it, in fact our family bought it from him in 93 for 13k and that he knows my brother who is executor…just one of those things that makes you go hmm.

As I said we only own part of the property and the oil company the other. The part we own is only 5,974 SF but they can’t live without those SF. The price based on local values per square foot seems right on at 16k for the area.

I have the lease extension in front of me but on closer inspection this is not the lease itself just the paper work to extend the lease. So I suppose that means the actual lease could be NNN? I will cann the courthouse where the lease is recorded tomorrow and see if I can get a copy, not sure if they do that or if it is public information.

Jolene