I’ve already talked to a few potential buyers, but I didn’t name a price. I simply mentioned the highlights, what it would cost to duplicate in today’s dollars, and a willingness to carry the financing if necessary. There is no outstanding mortgage, so no matter how it turns out, it’s all profit.
I’m not really interested in a JV, as I have no emotional attachment to the property, beyond the dollars it will bring me. To my experience, very few developers want to share that kind of glory on a trophy property anyway, and will typically only do so if it’s necessary to make the deal happen… which is basically my attitude toward one as well.
There’s also the fact that I’m 50 years old and ready for a warmer climate… so let’s just call this my “beach money” and leave it at that.
If they decide to persue it and I think they will, I have a presentation summary for review… but I’m not going to put an asking price on it out of the gate… instead, I’m going to let the property and the replacement cost do most of the talking and see where it goes.
I recently “inherited” an office building and have decided to sell it. The property is prime for condo conversion and there is buyer interest to do this. I know the original cost to build, as well as what it would cost to replace, in 2004 dollars (inflation adjustment).
Being as it’s a high-rise Class A property in the CBD, I think it should be offered somewhere between these two price points. Similar buildings, in my comp search, are being offered at nearly the replacement cost of this one.
I know that a lender would value it by appraisal, but I can’t see any reason (due to the quality of the structure and it’s location) why it would appraise for less than the original cost to build.
I also know most buyers would prefer to value it by cap rate, but current occupancy is at 10%… the 90% tenant recently vacated… which makes the potential condo conversion all that more practical, and lends credit to my belief that it’s true current value is as a “shell”.
Long story short, I’m trying to get a feel for how I should price it… Comments?
The last (and apparently only) appraisal was done the year after construction (1997) and was nowhere near the actual construction cost (but rather a fraction of it, which I find very hard to believe - and probably done (or arranged) in an attempt to hold the property taxes down).
We identified several similar-sized buildings in my comp search (not the same market - unavoidable with properties of this type), and the one that most closely resembles mine (in appearance and size) is listed at $135,000,000.
Since I’m basically delivering a “shell” at escrow, I believe it should be valued in the area of it’s replacement cost… almost $171,000,000 (rounded - in 2004 dollars).
It’s present level of occupancy (10%) has a SGI of $1,250,000/annually.
Posted by ray@lcorn on January 26, 2005 at 18:28:00:
Mike,
What you’re looking for is a buyer that will agree with your valuation. From a buyer’s perspective of just a normal bargain and sale proposition it comes down to how much of the profit he’s willing to give to you in order to get in the game. Put another way, it’s only worth your number if the buyer is willing to pay you for his risk and effort.
However, if you shift the buy/sell paradigm a bit, you could induce a buyer to take a look from a different viewpoint. if you’d be willing to bring something else to the table, like attractive terms, that will completely change the value proposition. Say you were willing to do some owner financing and agree to subordinate your mortgage to a construction loan to do the condo conversion. Pitch that deal to experienced developers… I’d go to the best in town first… I’ll bet you get a meeting pronto.
That’s puts you in the driver’s seat as far as who you choose to deal with, rather than begging someone to see it your way. By sharing the risk you’re adding value. You could structure it as a partnership, joint venture or participating mortgage. If you choose to stay in the deal all the way to the end, you may make much more than you’re presently considering.
Just an idea to spur your thinking. When the regular rules don’t apply, make your own!