Retail Disposition Model

Written by Bullpen Editors

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Retail Disposition Model

There are hundreds, if not thousands, of free investment models online to help maneuver the seemingly complex world of commercial real estate valuation. Many of these models, however, are overly simplistic, fail to analyze investment yield beyond the first year, and neglect to consider future expenses and their impacts on property-level returns.

My goal in creating this model was to:

  1. Create an easy-to-use retail disposition model
  2. Utilize a discounted cash flow method (DCF) of valuation
  3. Display results in a clean, professional format

This is a retail disposition model and should only be used to compute a sale price or current market value of a retail asset. With its “plug and chug” design, this model can be used by real estate brokers, investors, analysts, and even students.

The strengths of this model lie in its ability to conduct a discounted cash flow valuation using manual inputs and assumptions. Users of this model manually input global property assumptions, debt financing assumptions, and lease-up assumptions as well as operating expenses and tenant information, which are all select features that industry-wide ARGUS® Enterprise utilizes to compute cash flow projections.

The model supports up to fifteen tenants and cannot be used to underwrite single-tenant net lease dispositions. Property-level returns and valuation summaries are calculated automatically. All outputs are displayed in a clean, professional format that can be quickly exported to PDF format – making it easy to attach the valuation in an email or include it in an offering memorandum, investor presentation, etc.

Case Study: Strip Center – Denver Colorado

I used this model when underwriting a multi-tenant retail disposition in Denver, Colorado. I wanted to present the seller with a realistic picture of what investors might pay for the newly converted, five-tenant strip center down the street from my house. Originally an industrial building, the asset was repositioned to take advantage of the rapid change, increases in population, and influx of development and investment in the area.

Despite the strategic location, which was poised for future growth, there was a potential to add value. Tenant rollover in the next few months would destabilize the building and bring the occupancy percentage from 100% down to 75%. The vacating tenant was also paying a base rent equivalent to 35% below market rate, giving an investor the opportunity to lease the space at the then market rate, boost NOI, and re-stabilize the building.

I used the retail disposition model to conduct two valuations; an “as-is” valuation and a valuation accounting for the early lease termination. What proved most valuable was the ability to model the remaining tenant income before their expiration date, anticipate downtime, lease-up the vacancy using market rates with rent escalations, and estimate leasing costs. Because of the multifaceted nature of the model, I was able to thoroughly and quickly underwrite the property under two different scenarios to assess risk and return as well as provide the seller with a current market valuation even if they chose not to sell the property.

The seller was impressed with my valuation because it illustrated a clear picture; the asset had a lower valuation in the first year succeeding the early lease termination but surpassed the “as-is” value by the third year of the anticipated hold period. The seller used the valuation and its findings to adjust their investment strategy and make a sound investment decision.

I hope this retail disposition model helps you, too, draw conclusions on value and strategy.

Contributor: Rachel Ivers

My first introduction to financial analysis and Excel modeling was during my undergraduate studies at the CU Real Estate Center at the University of Colorado Boulder. Working with two large brokerages further strengthened my ability to analyze and model complex real estate transactions. As a real estate analyst, I focused primarily on underwriting for retail, office, and industrial dispositions, supporting capital markets advisers. Though I consider myself self-taught, the knowledge I gained as a real estate analyst created a solid foundation for me to build upon when I started to work independently. Today, I work with Bullpen to find quality commercial real estate analyst contract opportunities.

Purpose of this Model
  • Analyze the value of a multi-tenant retail disposition
  • Conduct an accurate DCF valuation
  • Forecast future cash flows
  • Arrive at an appropriate residual value
  • Model debt assumptions and analyze the impact of leverage
  • Compatible on Excel version 15.30.0 (2017) or newer

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