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Overcoming Challenges Appraising Mixed Use Property

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[fusion_dropcap boxed=”no” boxed_radius=”” class=”” id=”” color=””]T[/fusion_dropcap]hroughout the most recent construction cycle, mixed use development has been a popular trend.  We have all seen it, the multi-story building with first floor commercial space and apartments above.  These structures have been popping up in major markets all over the country.  Appraising mixed-use property can be a challenge. There never used to be an easy way track these properties. Most appraisal software is not designed with mixed use properties in mind. So, it was hard to value this types of commercial real estate.

Tracking Mixed Use Property in a Database

The first challenge is tracking mixed use properties in a database.  There has not been a uniform property classification throughout the industry.  Some commercial databases use the “Appraisal Institute Commercial Data Standards” for the property type classification, which does not track mixed use properties as a separate property type.  Instead, mixed use properties are classified as property subtypes within multiple property types.  This can lead to confusion when searching for mixed use properties. Even worse, some databases don’t have any standardization. They allow users to input their own property classifications.  This leads to serious data integrity issues, and an unstable database.

The Appraisal Institute recently published a new property classification. It’s called the “Property Use Classification System”, or PUCS for short.  One advantage of the new Property Use Classification System is that mixed use is a property class.  This is a standardized system for tracking property types. This system recognizes mixed use as a property type rather than having multiple sub classes under different property types.

Building Components

The second issue with storing data for appraising mixed use property is a more significant logistical issue.  The current products on the market allow for one building per property.  This makes describing the different components of a mixed-use property difficult.  Don’t describe the details of the property in the database. Instead, describe property details narratively. As a result, the data will be structured and reusable.

The solution is using a database product that has the ability to add multiple improvements to a single property.  This empowers users to track the various components of the property separately in one record.  For example, consider a property that is commercial mixed-use with first floor retail, second floor office, and multifamily above. This property could have three improvements within the same property record.  As a result, each record would have all relevant fields that impact all property types. That can include property size, year built, construction type, condition, etc.  Additionally, each record would have fields that are specific to that property type.  The most obvious of these three property types to have property type specific fields is multifamily.  Fields relevant for multifamily would include unit amenities, project amenities, and owner-paid utilities, for example.

Valuing Mixed Use Properties

Valuing mixed use properties can be a challenge.  Ideally, an appraiser can find enough data in the market of similar mixed use properties.  If there is enough data, then an appraiser can value the mixed use property just like other property types.  However, often there is not enough data in the market to only use mixed use buildings as comparables.  In this case, appraisers must use other property valuation tools.

Sales Comparison Approach for

If similar mixed-use real estate sales are not available, then the next option is to look at the separate components of the property individually.  This part is straight forward. Just value each component of the property separately using multiple sale adjustment grids.  At this point, an appraiser may be tempted to add up the indicated values of the separate components.  This may be correct, but the appraiser needs to do more analysis to be sure.  Since a mixed use building by definition has multiple uses, it appeals to a different pool of buyers than the sales that were used to value each comparable.  To remedy this issue, the appraisers needs to consider whether there is a premium or discount in the market for combining the property types, often based on professional judgement.

Income Approach

In theory, building the pro forma is simple.  The first step is to estimate the market rent for each component.  This requires a tool that allows multiple rental adjustment grids.  Next, the appraiser must estimate vacancy and expenses.  Finally, determine the capitalization rate.  When capitalization rate data for mixed use properties one method to estimate a capitalization rate is to look at a weighted average capitalization rate.  For example, if 40% of net income is for use “A”, then multiply the capitalization rate for that use by 40%.  Then multiply use “B” capitalization rate by 60%. Then, add the two indications together.  Again, consider whether there is any difference the risk profile due to the mixed use nature of the subject.

The Solution

Realquantum was designed mindful of  the complexities of appraising mixed use property.  Realquantum uses the “Property Use Classification System” as the basis for categorizing properties, and allows for multiple sites and multiple improvements on one property record. It tracks mixed use property data seamlessly, whether it’s a century old row type building or a brand new mixed use building with first floor retail, second floor office, and third floor apartments. It’s easy to add multiple improvements to a property.

Additionally, valuation is simple and straight forward. Users have the flexibility to analyze a property at whatever level of detail they choose.  Realquantum provides users with an unlimited amount of sales and rental analyses. So, they can address any valuation scenario. And, it’s all designed in the most simple and intuitive way possible.   As an added bonus, realquantum includes a built-in reminder for users to consider whether there is a premium or discount to the value.

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Appraising mixed-use commercial real estate is complex enough already.  So, select a tool that helps appraisers organize the various property types clearly. Realquantum allows appraisers to focus their time on providing the best professional analysis, not juggling spreadsheets. Ready to talk to someone about how realquantum can help you?

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About the Author:

Matt Speer, MAI, is a practicing commercial appraiser in the Kansas City market. He is a co-founder and the product owner for realquantum.

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