Distressed Commercial Real Estate Properties - How should the asset be valued?

Jon Winick, President & CEO, Clark Street Capital, recently spoke at Coleman's "Best Practices in Coping with Distressed CRE Properties" Webinar on July 14, 2010.

Winick gave an excellent example of a distressed CRE property.

Example: Retail Property

Situation
• 10,000 SF brand new 10-unit retail strip center
• 50% occupied
• 100% of the leases roll off by 12/11
• Current Rents $21.00 - $24.00 psf
• Current competition: 30,000 sf within a 3-mile radius
• Current Market: $12.00 psf

Reality
• Buyers & Tenants know current market rents; often, appraisers and banks are too optimistic
• Paradigm shift: at the peak, buyers bought on an optimistic pro-forma and ignored actuals; now, actuals are discounted
• Lease-up periods are longer today
• According to the bank's current appraisal, the appraiser used 85% occupancy at $21.00 psf for valuation purposes!

Disconnect
• Fighting the market serves no one's interests
• Income capitalization method is the only metric that offers current data; sales comparison approach is stale and the cost approach is worthless
• Is appraiser doing their job? 1717 the What should the bank do?
• How should the asset be valued? What is the realistic time frame?
• How will potential buyers value this? Can you blame them?

Category:

News & Politics

Tags:

• Bob Coleman
• Jon Winick
• Coleman Report
• Clark Street Capital
• Small Business Lending
• Commercial Real Estate
• SBA Lending