Most property owners have a general idea of what their property is currently worth “as is”. Few owners, however, have an understanding of the potential value of their property taking into account the current market conditions and highest and best use.
Property owners, property managers, and asset managers are faced with an endless number of decisions relating to the ongoing operation of real estate assets. Occasionally the question ‘What should I do with the property’ arises. Below are some options to consider:
- Do nothing other than continue to maintain and hold the property on an “as is where is” basis.
- Undertake minor upgrades and renovations to the existing improvements.
- Undertake major upgrades and renovations to the existing improvements.
- Convert the existing improvements into another use.
- Expand the existing improvements.
- Demolish the existing improvements and re-develop under the existing zoning designation.
- Re-zone the property to allow for a higher density or an alternate use.
- Assemble the property with adjacent lands.
Determining which is the ‘best option’ can be a complex exercise with many factors, risks, and variables to consider. At Altus Group, the general process that we undertake to assist our clients with making these decisions is as follows:
Retention and Renovation of the Existing Improvements:
- Review of the market in which the property is located. For income properties, this would include:
- An Economic Overview – A review of the main economic indicators, both historical and projected, is required in order to determine if the future outlook of the local market and surrounding areas is positive or negative.
- A Competition and Leasing Market Overview – In order to estimate the future earnings potential of a property, an analysis of any competing properties and the rental rates which are being achieved in these properties is required. In addition, a review of new and any proposed developments in the area needs to be conducted.
- An Investment Market Overview – An analysis of investment demand, investor preferences, and a survey of current valuation parameters will assist in estimating potential revenues as well as estimating the properties potential ‘liquidity rating’. In other words, ‘how difficult will it be to re-sell the property in the future if required to do so’.
- Prepare a legal review of the property. This includes:
- A title search and a summary of all charges registered on title.
- An opinion of any impact on value with respect to the charges which are registered on title.
- A review of the heritage site registry. A ‘Protected Property’ or a property which is on the heritage list could affect the properties future development potential.
- A review of the properties specific zoning and official community plan designation, and any other municipal regulations. This is required in order to determine if the property conforms to current municipal requirements as well as to assist in identifying the future development potential of the property.
- A review of the business licenses to determine if the building operations on the property are in good standing.
- A review of the most recent Fire Marshall and Health Department inspections to determine if there are any outstanding orders.
- Estimate the current market value of the asset “as is where is” with no renovations.
- Prepare a physical and environmental review of the improvements. This includes a review of:
- The structural soundness of the improvements and the services to the improvements. This includes a review of the structure, exterior envelope (walls, windows and roof), interior finishes, and exterior site works.
- The condition of the roof, electrical and mechanical facilities, elevators, and air quality.
- The presence of any environmentally hazardous substances (such as asbestos).
- The presence of any insect and rodent infestation.
- The presence of any soils contamination (examples of this could include seepage from an adjacent gas station or an old dry cleaning operation).
- The overall type and condition of the soils, and their overall stability with regard to the existing improvements and any future development.
- Any potential of flooding.
- Quantify and estimate the costs of recommended upgrades and renovations.
- Prepare a financial feasibility analysis which will outline the costs, revenues, timelines, risks, and returns associated with the suggested building upgrades and renovations. This would involve an estimate of the market value of the property upon completion of all upgrades and renovations.
Demolition and Re-Development:
- Discussions with representatives from the local municipality/district to identify various approved uses under the existing zoning designation. This involves a review of planning constraints (zoning bylaws, other development regulations, potential impact of public review process, the City’s current visioning process, and official development plan amendment potential).
- Consideration of rezoning potential, and the cost, timing, and risks associated with achieving any alternative scenarios. This may include an analysis of the economic and municipal financial benefits which would result from the proposed development, including job implications during construction, and other types of economic benefits flowing from the development of the lands.
- Assess the potential of any land assembly with adjacent parcels
- Review of current and anticipated micro and macro-economic conditions.
- Analyze supply and demand in order to ascertain the probable market acceptance and absorption for the project.
- Estimate the value of the land as if vacant under the existing zoning as well as based on any re-zoning scenarios.
- Preparation of development Proforma to estimate potential developers profit and developers profit margins associated with various development concept schemes. This would include an analysis of potential revenues, absorption rates, cost of demolition of existing improvements, hard construction costs including parking, soft constructions costs, land dedications, off site and on site servicing requirements, property taxes, holding costs, inflation rates, and risks.
At Altus Group, we assist our clients in making decisions with respect to their existing assets.