The Shopping Center – Setting The Value

The shopping center of today is a change from the centers built originally. They were a collection of stores for retailing, rather than a newer, more modern mix of businesses and entertainment.

The average shopping center or mall has had certain characteristics in the past:

• The stores in the center usually complemented each other rather than competed with one another. A large center often had a major department store or supermarket as an “anchor” tenant. It may also have had stationery, drug, hardware, variety stores and other retail operations. It could also have service type operations such as dry cleaners, restaurants, gasoline stations and often a minor repair shop for automobiles.
• In the well-planned center of today, there will be a unified architectural design with the stores connected by malls. Newer centers have these malls completely enclosed and air-conditioned.
• It always will have large parking areas, often covering more than half of the entire site.
• Built into the original design are special facilities to service the stores, with loading docks and platforms as needed.
• There will usually be a merchant’s association in larger centers, responsible for the maintenance of common areas, lighting, cleaning parking lots, landscaping, security and other items of common interest.

How To Set The Value

When a person is either a buyer or a seller of a shopping center, the question of value for a sale is paramount. How do you appraise such a property? In commercial properties, there are three types of approaches to value commonly used. They are: The Market Data Approach, The Cost of Replacement Approach or The Income Approach.

The Market Data Approach to appraisal is seldom used in a shopping center. It relies on a comparison of sales of similar properties. Since this type of property may be unique in an area, there usually are just not enough properties to compare with it to establish a true value.

The Cost of Replacement Approach to appraisal is computed on a per-square-foot basis of construction costs to replace the buildings with the current value of land added to the formula. This type of appraisal might be a little closer to the current value than a market data approach.

The Income Approach to value would usually be the most appropriate method for a shopping center. The appraiser would use the net income from the current rents, capitalized at a determined rate to establish the value. The value would then be based on what the property is actually doing financially, and would be more accurate than the other two approaches.

A good appraisal would usually have all three of these approaches to value contained in the report. While the other two should have some bearing on the value, the Income Approach would be given the most attention.

Existing Leases

The existing leases could have an effect on future income, even if a good estimate of current value has been obtained. Some things to look for in the existing leases in a shopping center would be as follows:

1. Do the leases contain rent escalation clauses? On what are they based?
2. Are tenants required to keep their stores open, or merely pay the rent? A major chain store might find that closing the store that is losing money could be less of a loss than just paying basic rent for the balance of the lease.
3. Are all of the expenses or common-area maintenance shared among the tenants of the center?
4. Do the leases have the provision that tenants must be members and contributors to the center’s merchant’s association?
5. Do any of the leases place any burdensome restrictions on the owner? Are there exclusives?
6. Do any leases contain options for renewals? If so, what are the terms?
7. Do any of the leases allow the tenant the right to cancel?

Since leases with major tenants were originally negotiated skillfully with legal experts on both sides, they should now be evaluated carefully by an expert real estate broker and attorney.

This is the very basic data to start an owner or buyer into a transaction on a shopping center. On a specific property, you should be guided beyond this by your real estate professional.