To Own or To Sell: Managing Land Assets

[under development]

The Taxpayer Gold page we took a detailed look at commercial “comps” (comparative businesses) in Maplewood Village and discussed the range of tax assessments that currently exist.  We also looked at the nominal rental income possible when assuming a rate of $12 per square foot (paid by US Postal Service) and $25 per square foot (which is lower than many businesses in the Village currently pay).

Capitalization Ratio

When looking at the approximate market value–that is, sales price–of a commercial building a calculation evolving the capitalization ratio is the most common approach taken.   The cap ratio uses the net revenue (lease income) that an owner expects, and applies a rate-of-return expectation that is based on the local commercial real estate market.

Example:  If a property has a tenant the pays $12,000 per year, and the cap ratio that is applied locally to that type of tenant is 5%, then the approximate market value of the property is $12,000/.05 = $240,000.

For properties in Maplewood Village, an established, stable and desirable business district, cap ratios in the range of .055 to .065 would apply to most buildings with commercial tenants, with the exact figure being determined by the type of tenant(s) and current lease.  A larger cap ratio implies a lower market price, for the same income level.  This would be applied to a less desirable tenant, and/or less desirable lease (short term, other limitations).   The smaller capitalization ratio would be used for a tenant with high credit rating (many national chains, for example), and longer-term leases.

From these figures it is straight-forward to generate a table with examples of potential market value for properties of various sizes and commercial tenant types.

<insert table here>

Examples Based on Village Post Office

The discussion tax income and lease income used a variety of examples based on size and tax assessment per square foot, leading ultimately to the seasonal Maplewood Revenue Rainbow.

For this discussion, using the Post Office building as an example, we consider four specific examples:

  1. The Township retains ownership of the building and modernizes the front portion to be used as a postal service counter and professional offices.   The front portion is approximately 6,000 square feet and includes at-grade access, loading dock access, and rest rooms.  The remainder of the building (totaling approximately 9,000 square feet) is either shuttered for the short-term, or put to below-market/public uses.
  2. The Township retains ownership of the building and modernizes it in preparation for a supermarket to occupy the entire structure.   A management firm is contracted to manage the construction and on-going building management.   Other than the preparation work, this arrangement parallels the lease that the Postal Service operated under since 1958.
  3. The Township sells the property, and a private investor executes example number two.
  4. The Township sells the property to JMF Properties and the Post House is constructed as proposed.

[values explained, column chart presented]